Consumers have been on a spending spree, but economists are beginning to question the long-term viability of this trend. The most recent data on personal consumption expenditures has raised concerns among some experts, who view the current situation as “unsustainable.” The primary cause for alarm is the decline in the share of disposable income that people are able to save.
According to the Bureau of Economic Analysis, the personal savings rate dropped to 3.4% in September, down from 4% in August. This significant decrease is in stark contrast to the high savings rate of 32% experienced during the height of the pandemic in April 2020. Despite this decline in savings, consumer spending saw a notable increase of 0.7% in September, surpassing expectations and demonstrating the strength of the economy.
However, market and industry intelligence firm Morning Consult’s senior economist, Kayla Bruun, raises a valid concern. She suggests that the recent surge in purchases may not be sustainable in the long run. Bruun mentions that households may have to either reduce their spending or rely more on debt as a means of maintaining their current consumption levels.
Gregory Daco, chief economist at EY, echoes these sentiments. He notes that the underlying drivers of spending are not particularly reliable or sustainable. Dipping into savings is not an encouraging sign for households, according to Daco.
Furthermore, Daco emphasizes that real income growth is crucial for sustaining healthy consumer spending patterns. However, government data reveals that real personal disposable income, after taxes and adjusted for inflation, has experienced a decline for the third consecutive month, following a year of growth.
In light of these concerns, it becomes increasingly important to address the sustainability of current consumer spending levels and explore strategies that can foster lasting economic growth. With the decline in real income and dwindling savings, a careful reassessment of spending habits and financial planning is necessary moving forward.
The Unsustainable Dip in Savings
As the economic landscape continues to evolve, Americans are facing a concerning decline in their savings. The lasting impact of this trend raises questions about its sustainability and its effect on consumer spending.
A recent survey conducted by Bankrate revealed that nearly a third of Americans have experienced a decrease in their emergency funds since the beginning of the year. This reduction can largely be attributed to the higher prices and rising debt repayment costs that individuals are currently facing. In fact, inflation reached 3.7% in September according to the Bureau of Labor Statistics.
During the pandemic, government stimulus payments and limited spending opportunities enabled individuals to accumulate more savings than usual. In a survey conducted by the Federal Reserve, it was found that the average American household’s net worth surged by 37% from 2019 to 2022, placing them in the millionaire status.
However, the year 2023 has presented new challenges for consumers. The combination of high inflation and interest rates has started to impact households. Delinquency rates for auto loans and credit cards have been on the rise, revealing cracks in household balance sheets. This indicates that the excess savings accumulated during the pandemic have likely been depleted, especially for middle-income and low-income families. With the holiday season approaching, it is expected that households will face additional financial strain.
Furthermore, increased wealth does not necessarily translate into higher spending when individuals lack readily available cash. This is especially true when a significant portion of wealth is tied up in assets that are not easily sold, such as gains in the stock market.
The question arises: do people choose to spend their accumulated wealth, or do they continue accumulating it? According to experts, while individuals may be wealthier on paper, they do not necessarily have increased liquidity and accessibility to their assets.
In conclusion, the current dip in savings among Americans is raising concerns about its sustainability and its impact on consumer spending. As individuals navigate the economic landscape, it becomes crucial to assess their financial state and make informed decisions regarding their wealth and savings.