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Is the Consumer About to Be Tapped Out?

September 27, 2023 | Posted in: Insights

One of the many unforeseen consequences of the Covid pandemic was the accumulation by most Americans of unusually large levels of personal savings. This is attributable to both government assistance programs and the fact that many forms of personal spending were halted during the lockdowns. The following graph shows the level of savings for different income groups after adjustment for inflation as compared to March of 2020. At the peak, the savings of the highest 20% of earners (the yellow line) exceeded pre-Covid levels by almost 30% and even the lowest earners (the black line) saw their savings grow by around 5%.

Despite an increase in short term interest rates from essentially zero to 5.5%, the economy has defied gravity by continuing to grow at a moderate rate. The primary driver of this pleasant surprise has been consumer spending which has been supported by relatively full employment and the aforementioned high level of savings. But, here’s the rub. As shown above, savings for all but the top 20% of earners is now below the March 2020 level. So, while one source of spending may be largely depleted, the labor market remains strong and consumer credit is widely available. Whether we experience a recession or a “soft landing” will largely depend on the consumer who represents 68% of the overall economy. So, among the overwhelming number of economic statistics to which we are all subjected, the trend in retail sales merits particular scrutiny.