Americans amassed a big pile of savings during the pandemic, but high inflation is eating away at their rainy-day funds.
The U.S savings rate fell several ticks to 3.1% in September and stood near the lowest level in 14 years, the government reported Friday.
Just one year earlier, the savings rate was three times higher.
The low savings rate suggests that households would have very little financial cushion if the economy sinks into recession by next year as many economists predict. Households are saving only one-third of the amount of money they did before the pandemic.
Until very recently, economists had assumed that a high level of savings could keep the U.S. out of recession. By some estimates households had an estimate $3 trillion to $4 trillion in extra savings compared to the year before the pandemic.
For one thing, the government overestimated the amount of savings. Newly revised figures in the summer showed a much lower savings rate than initially reported.
“Consumers didn’t have quite as much money saved up as previously thought,” noted chief economist Gus Faucher of PNC Financial Services.
A spike in inflation to the highest level in 40 years, meanwhile, forced households to dip into their savings to pay for all their purchases. The rate of yearly inflation jumped to as high as 9.1% from less than 2% just two years ago.
“Households continue to tap excess savings to allay the rising cost of loans and nearly everything else,” said senior economist Sal Guatieri of BMO Capital Markets.
The Federal Reserve’s shift to an aggressive strategy of raising interest rates to combat high inflation has also raised the cost of borrowing. Mortgage rates, for instances, have jumped to a 20-year-plus high of 7%.
Economists estimate that households still have $1.5 trillion to $4 trillion in extra savings compared to pre-pandemic levels. But even if those estimates are accurate —- the big government revisions raise doubts — it could still be misleading.
It’s likely that the bulk of the extra savings are concentrated among higher-income households, economists say. If so, it would mean millions of families are already stretched to the limit.
Whatever the case, Americans can’t keep relying on their savings to support their spending habits, especially if the economy slows and unemployment rises.
Spending rose above forecast again in September to defy expectations of a faster dropoff in household purchases.
It’s a “a dynamic that can’t persist indefinitely,” said Oren Klachkin, lead U.S. economist at Oxford Economics.