Consumers Running Out of Excess Saving. Will They Drop Or Continue To Shop?

This is an excerpt from the May 13, 2024 Yardeni Research Morning Briefing.

Bears have been growling since mid-2022 that the US consumer will soon be “tapped out” of the excess savings accumulated during the Covid-19 fiscal stimulus spree from 2020 to 2021, forcing them to rein in spending. Consumers also may soon have maxed out their credit cards, according to this gloomy narrative. Consider the following:

(1) Sure enough, two San Francisco Fed economists in a May 3 post observed that “[t]he latest estimates of overall pandemic excess savings remaining in the U.S. economy have turned negative, suggesting that American households fully spent their pandemic-era savings as of March 2024.” Nevertheless, they came to the same conclusion that we have: “The path of consumer spending in the United States is difficult to forecast with any degree of accuracy. Nevertheless, the depletion of these excess savings is unlikely to result in American households sharply cutting their spending levels as long as they are able to support their consumption habits through continuous employment or wage gains, other forms of wealth—including non-pandemic-related savings—and higher debt.”

According to this post, cumulative pandemic-era excess savings peaked at $2.1 trillion during August 2021. It then fell and turned negative (-$72 billion) during March 2024.

(2) Underlying the consumers-are-cracking story is the flawed presumption that even if real disposable income continues to grow, it will be offset by a rising personal saving rate (Fig. 10 and Fig. 11). The result, the thinking goes, will be weaker consumer spending, which will depress employment, which will further depress consumer spending, resulting in a consumer-led recession.

Our story is that the personal saving rate won’t rise but will remain low. So real consumer spending will continue to increase along with real personal disposable income. The saving rate dropped from 26.1% during March 2021 (i.e., at the peak of excess saving) to 3.2% during March this year. If it remains this low as we expect, it will be because more and more Baby Boomers are retiring and living off the income from their retirement savings or spending more of the principal.

As Melissa and I have observed before, Baby Boom households have a record $76.2 trillion in net worth (Fig. 12). They are the richest cohort of seniors ever. According to Census data, of the 86 million households who own their own homes, almost 40% had no mortgage in 2022. Most of them are probably Baby Boomers. And many of those who have mortgages refinanced them at record-low rates during 2020 and 2021 (Fig. 13).

Most of the Baby Boomers probably purchased their light trucks (including SUVs) outright for cash. How else can we explain the fact that auto sales have held up around 15.5 million units (saar) for the past two years when auto loan rates have soared (Fig. 14)? Americans increasingly have been buying expensive light trucks, which currently account for a record 80.7% of retail motor vehicle sales, up from 50% during 2013 (Fig. 15)! Almost all the Baby Boomers are done making college tuition payments for their kids.

(3) On the other hand, younger households with less income and net worth may very well have no choice but to save more if they’ve run out of their excess saving. Most might do so by borrowing less. (Remember that saving is equal to the change in assets minus the change in liabilities.) According to data compiled by the Fed, at the end of last year, Baby Boomers had a collective $1.1 trillion in consumer debt, while GenX and Millennials had $3.8 trillion in consumer debt (Fig. 16). The same database shows that Baby Boomers had $2.7 trillion in home mortgages compared to $9.9 trillion for the two younger generations (Fig. 17).

(4) Meanwhile, revolving credit in consumer credit outstanding continues to rise to new record highs (Fig. 18). It rose to $1.3 trillion during March. However, that’s only 6.4% of disposable personal income (Fig. 19). Then again, credit card rates have rocketed to 21.6% from around 15% before the pandemic (Fig. 20). Delinquencies are climbing but remain below 10% of total credit card balances (Fig. 21).

We’re keeping an eye on “Buy Now, Pay Later” (BNPL). A recent poll cited by Bloomberg “found that 43% of those who owe money to BNPL services said they were behind on payments, while 28% said they were delinquent on other debt because of spending on the platforms.” That could spell trouble for BNPL users in the lower-income cohort, as eventually the bill comes due. But for now, income growth continues to support consumer spending.

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