Americans will run out of pandemic savings next month, Fed warns

Szu Ping Chan
Thu, 17 August 2023

A shopper carries a Zara retail bag along the Magnificent Mile shopping district in Chicago, Illinois, US,

Americans will burn through all their pandemic savings by the end of September, according to estimates by the Federal Reserve.

Research by economists at the Federal Reserve Bank of San Francisco found Covid-related savings in the US had fallen to less than $190bn (£149bn) in June.

This was down from $2.1 trillion at its peak in August 2021, which was fuelled by a $800bn giveaway that handed American households Covid support cheques worth thousands of dollars.

Tim Drayson, head of economics at Legal and General Investment Management, said the “unsustainable drawdown of savings” had put the world’s biggest economy “at a potential turning point”.

He said: “Once you have run out of excess savings, your savings rate needs to bounce back potentially quite quickly, so that would be the period when consumption will be weaker than income growth.

“That could be occurring at a time when payroll growth is slowing, income growth is slowing, you’ve got headwinds from student loan repayments restarting, and a lot of fiscal support going into reverse.”

He added that a long series of interest rate rises by the Federal Reserve was also starting to bite.

It came as separate research by Société Générale showed UK pandemic savings were currently estimated at £316.5bn “and rising”.

This is equivalent to around 12.5pc of the entire UK economy, which is the highest as a share of GDP among major advanced economies.

Klaus Baader, an economist at Société Générale, said a recent rise in precautionary savings” could reflect a “fear of unemployment or renewed surges in electricity bills”.

However, he added: “If it is the latter, and assuming that a further energy price shock will be avoided, it points to a particularly large rebound potentially in UK household spending.”

The Fed research showed household disposable income was lower and personal consumption was higher than previously anticipated.

It said: “Should the recent pace of drawdowns persist – for example, at average rates from the past three, six, or 12 months – aggregate excess savings would likely be depleted in the third quarter of 2023.”