News or Noise: “EXCESS SAVINGS” Cushion
News or Noise: Excess Savings! – NOISE as a term, News in practice
The term “excess savings” is a economic term widely thrown around now days on the financial news networks. In my opinion, most of the time it is used to imply that consumers in the US are in “good shape” and our consumer led economy is chugging along; and the Fed’s work isnt done yet. The implication many are trying to make is that the Fed can keep raising interest rates if they see fit. I mean certainly if Americans have a cushion of “exceess savings, then things can’t be too bad. Right? Investors, in my opnion, this is total real -world nonsense. And the data behind the scenes proves it out.
Measuring Excess Saving
Economsts have recently calculated “excess savings” to compare the increase in household net worth and resources from changes in saving behavior since the start of the Covid pandemic. Beginning in 1q2020, the amount of excess savings is the change between actual saving and what saving would have been likely at the pre-Covid saving rates out of actual disposable income. These totals are summed through the current period. Economists then divide these totals of excess savings by disposable income to allow comparisons and changes in trend.
This method assumes that the saving rate without the pandemic would have remained equal to the five-year pre-pandemic average. Excess savings in the U.S. reached about a max of 14 percent of annual disposable income, on the backs of social lockdowns and simultaneously, government checks. Since its peak, U.S. excess savings has declined, falling to 10 percent of disposable income ($1.9 trillion) by the second quarter of 2023. In sharp contrast, excess savings abroad has held flat relative to disposable income.
Post pandemic, global saving rates have fallen across the board relative to 2020-21. However, only in America has the savings rate dropped below its pre-pandemic average. Yes, you read that right. Americans are saving less, not more than pre-pandemic. According to government statistics, the average U.S. saving rate since 2022 is actually now down near 2.5 percentage points from our 2015-19 average.
This term is noise to your investments, however it’s final affect is not. It’s a term recently dredged up by economists, politicians, and many in the financial press to justify, otherwise overly generous taxpayer funded Covid pandemic government, giveaway and subsidy programs. Yes, many were vital and needed, but it was taken to an extreme in 2020-2021. We have no “excess savings” in America and in fact are a nation of consumers much more than savers. However, whatever its called, excess savings or misallocated government subsidies, it’s has supported U.S. growth the last 18 months into the headwinds of lagging real income growth and tighter financial conditions brought on by higher inflation and the Fed raising rates. Expect these headwinds to American consumers to continue and possibly acclerate in the 4th quarter as 1) student loan repayments retsart, 2) childcare subsidies end, 3) mortgage rates have hit 8%, 4) auto and home loan costs are at 20 year highs, and entertainment and travel costs have remained elevated. Hell, I even saw that the Girl Scouts just raised their cookie prices from $5 to $6 per box. Whatever these items are called, they are headwinds to the US consumer who still accounts for 70-75% of our economy.
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