The Impact of Americans' Diminishing Pandemic Savings on a Smooth US Economic Recovery

The Potential Risk of Depleting Pandemic Savings on the US Economy

The depletion of excess savings among American consumers could pose a challenge to the U.S. economy's ability to achieve a soft landing as the Federal Reserve continues to fight inflation. During the COVID-19 pandemic, the federal government provided trillions of dollars in financial support to stabilize the economy. This influx of cash resulted in an increase in savings for many American households, referred to as "excess savings." However, the excess savings that peaked at around $2.1 trillion in August 2021 has now fallen to approximately $500 billion as of this spring, according to economists at the Federal Reserve Bank of San Francisco. While the remaining savings could support consumer spending into the fourth quarter, there is uncertainty surrounding this outlook. It is possible that households may have a higher desire to save, significantly shift their spending habits, or receive other sources of income that offset the expired pandemic-era cash flows. A separate report by Federal Reserve economists specializing in international finance found that the U.S. depleted its excess savings from the pandemic slightly faster than other advanced economies in the first quarter of 2023. The sharper decline in excess savings means that these funds played a bigger role in supporting demand in the U.S. economy over the past year compared to other countries. Whether the excess savings have already been depleted or are likely to be tapped out by the end of 2023 or early 2024, their expenditure could lead to diminished consumer spending, making it harder for the economy to achieve a soft landing and avoid a deep recession. Federal Reserve Chairman Jerome Powell expressed optimism about the U.S. economy's ability to avoid a deep recession, citing strong consumer confidence as a reason. However, as the excess savings are depleted and consumer spending potentially decreases, the economy's resilience may be tested. Furthermore, the resumption of student loan repayments this fall could also force borrowers to tap into their remaining excess savings from the pandemic. With loans scheduled to resume accruing interest in September and payments due in October, this could further impact consumer spending and the overall economy. In conclusion, the depletion of excess savings among American consumers poses a challenge to the U.S. economy's ability to achieve a soft landing as the Federal Reserve continues to fight inflation. As these savings are spent, consumer spending may diminish, making it harder for the economy to avoid a deep recession. The resumption of student loan repayments adds another factor that could impact consumer spending and the overall economic outlook.

Hot Take: Impact on Newly Formed Businesses

The depletion of excess savings among American consumers could have a significant impact on newly formed businesses in the United States. As consumer spending potentially decreases due to the expenditure of savings, small businesses, especially those reliant on consumer demand, may face challenges in generating sufficient revenue to sustain their operations.

Newly formed businesses often rely on a favorable economic environment and consumer spending to gain traction and establish themselves in the market. With a potential decrease in consumer spending, these businesses may struggle to attract customers and generate sales, hindering their growth and survival.

Additionally, the resumption of student loan repayments could further compound the challenges for new businesses. As borrowers tap into their remaining savings to make loan payments, they may have less disposable income to spend on non-essential goods and services provided by newly formed businesses. This could lead to a decrease in customer demand and negatively impact the viability of these enterprises.

In order to navigate these potential hurdles, newly formed businesses may need to adapt their strategies and find innovative ways to attract and retain customers. They may need to focus on offering value, differentiating themselves from competitors, and building strong customer relationships. Furthermore, seeking out alternative sources of funding or exploring partnerships and collaborations could help mitigate the impact of reduced consumer spending.

In conclusion, the depletion of excess savings among American consumers, combined with the resumption of student loan repayments, could pose challenges for newly formed businesses. These businesses must be prepared to adapt, innovate, and find creative solutions to sustain their operations and thrive in an uncertain economic landscape.

Original Article First Published at: https://www.foxbusiness.com/economy/americans-dwindling-excess-pandemic-savings-hurt-chances-us-economy-soft-landing