Americans’ Pandemic Savings Have Been Holding Back A Recession. Now They’re Running Out.

Out-of-hand inflation threatened to turn the US off spending, which would’ve undoubtedly brought about a recession. But consumers had some cash under the bed: Americans saved up during the pandemic, storing stimulus checks and government benefits, while skipping luxuries like dinners out and vacations. And because they’ve been spending it since, they’ve been shielding the economy from a recession – even after the Federal Reserve (the Fed) hiked interest rates at the fastest pace in four decades. But according to a recent assessment by the San Francisco Fed, Americans’ pandemic savings will likely run out this quarter, after they wiped their piggy banks of nearly $2 trillion over the previous two years.

US households now face a dilemma: either spend less or take out loans to maintain their lifestyles. But with the Fed’s hikes making credit more expensive and harder to get, Americans will most likely have to cut back. That's not good news for the US, considering consumer spending makes up over two-thirds of the economy.

Now, some economists are more optimistic, believing that falling inflation and a robust job market will give consumers the means to keep spending, even as their savings shrink. But if you’re not a sunny-side-up type of thinker, then yes, there is the risk that curtailed consumer spending might just tip the US economy into a recession. Bear in mind, though, that situation could present you with an interesting investment opportunity. See, sectors reliant on discretionary – that’s non-essential – spending will face headwinds as households tighten their purse strings, while industries that cater to essential needs, like consumer staples, could benefit as Americans become more price-sensitive.

If you see that happening, you could implement a long-short trade by buying, say, the Consumer Staples Select Sector SPDR Fund (ticker: XLP; expense ratio: 0.10%) and shorting the Consumer Discretionary Select Sector SPDR Fund (ticker: XLY; expense ratio: 0.10%). While XLY (consumer staples) has underperformed XLP (consumer discretionary) by nearly 30% this year, disappearing pandemic savings could mark that trend’s turning point.