When the pandemic began, the savings accounts of middle Americans soared. The government dolled out trillions, and since everything was shut down, no one had anywhere to spend all of that cash.
The question now becomes, how much of it is left? Why is this important? Because the main thing keeping our economy rolling at this point is consumer spending. And once those savings accounts dry up, our economy will probably recess.
There are many ways to measure this, but most don’t tell us exactly what we need to know.
One way is to look at the personal savings rate. This measures the amount of savings the typical family has in after tax money. In April of 2020, that rate was 33.8%. This year it’s averaging 4.3%.
Another way to look at this problem is through excess savings which is the amount people have beyond what they would normally have. Using a study by the San Francisco Federal Reserve, in August of 2021, that amount was $2.1T. Last quarter it was down to $190B.
Other economists have very different answers. The people at Goldman Sachs, for example, have calculated that number to currently be $1.3T. But, by definition, this isn’t the sort of thing where we’ll be able to get an exact figure.
My point is that savings accounts are drying up. Whether the exact date that the pandemic bonanza runs dry happens to be this quarter, next quarter, or sometime next year, it is coming. And when that happens, consumer spending will do the same.
This, in turn, will probably push our economy into a recession.
Let me leave you with this.
Some of the basic inflation numbers came out this morning, and they weren’t horrible.
Personal Consumption Expenditures (PCE) excluding volatile gas and food prices rose 0.1% in August. Economists had expected them to rise by a greater percentage.
When looking at the year-over-year averages, PCE, the Fed’s most preferred gauge of inflation, put last month’s number at 3.9%. This was lower than the prior month but still not at the Fed target of 2%.
I really dislike writing these articles of doom and gloom, but I have a responsibility to prepare all of you for what may be coming. No one would be happier to be wrong on these dire predictions than me.
But we all must prepare for what may not be a great 2024.
After the last few weeks of the markets declining, much of the optimism entrepreneurs and investors had has evaporated. People were writing articles about how the economy would have a soft landing.
Now most of what we read is about how the Fed will be forced to keep interest rates higher for longer. Many are even saying that higher interest rates are here to stay.
Whatever the future happens to bring, it’s always better to be safe than sorry. Horde your cash. Trim the fat. Be conservative in your planning and your outlook.
Be ready. Next year might be one that separates the grown ups from the kiddies.
We’re all going to get through this. Let’s get through it together.
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