Inflation forces people to dip into their savings, which is a bad sign for the economy

It turns out that Americans aren’t sitting on a big pile of savings to help them weather high inflation or another recession.

The US savings rate fell to a 14-year low of 3% in June and was still just 3.5% at the end of August, according to updated government figures .

That’s far less than previously announced – and it could have big implications for the economy’s ability to avoid a second recession in four years.

Many economists believed that households had enough savings to help them cope with rapidly rising prices. Inflation jumped 8.3% over the past year, marking the fastest rise since the early 1980s.

Some even thought that relatively high savings might allow Americans to spend enough to avoid an impending recession. Consumer spending generates about 70% of what happens in the economy.

Yet the government’s annual overhaul of household finances suggests that Americans have far less of a cushion than previously thought.

Just last month, the government announced a 5% savings rate in July. And at the end of 2021, the savings rate stood at 8.7%, relatively high.

Recently revised data puts the savings rate much lower. The savings rate was just 3.5% in July, compared to a revised rate of 7.5% in December.

The drop in the savings rate might not be huge if it was simply the result of government miscalculations. What is more worrying is how quickly it fell.

High inflation deserves a large share of the blame, say economists.

“The headwinds caused by inflation mean consumers are dipping into savings to fund spending,” said EY Parthenon chief economist Gregory Daco.

Even the current savings rate may be overstating Americans’ ability to spend. Most savings are in the hands of small businesses and high-income Americans. The middle classes and the poorest have less savings and therefore less ability to spend.

Economists are not convinced, however, that Americans used up most of the savings during the pandemic, when the federal government handed out trillions of dollars in benefits.

Chief Economist Ian Shepherdson of Pantheon Macroeconomics estimates that Americans have used about 30% of their pandemic savings, but there are still $1.4 trillion or more in “surplus” savings still available. Some suggest that the savings stock is even more important.

That’s “more than enough to avoid recession next year if people choose to reduce it,” he said.

The problem is that recessions tend to encourage people to save more in case something bad happens to them. Losing a job, for example, or dealing with an unexpected medical or other bill.

“Consumers will face tough times in 2023, and they could cut spending as the labor market softens, pushing the overall economy into recession,” said chief economist Gus Faucher of PNC Financial. Services.