about 1 year ago • 1 min
The pandemic had a generally positive effect on US household finances. With people forced to stay at home and with many receiving financial aid, disposable income – what’s left over after paying all the bills (black line) – surged well above its 30-year trend (blue line). This allowed consumers to enjoy an “excess disposable income” (red bars) and build a welcome savings buffer. And those two things together can help explain why retail consumption has remained so resilient despite the slowdown in economic activity this year (on top of explaining why tech stocks and crypto did so well last year).
This won’t last forever. See, the savings rate started to deteriorate in late 2021: financial aid stopped, and then soaring inflation and rising interest rates started to squeeze household budgets. Disposable incomes were pushed way below their average, and consumers began spending that accumulated excess income.
And that leads us to where we are today. With excess income now back to zero – and with disposable incomes now well below trend – households might be forced to draw on their savings to pay the bills. And the problem is: they can deplete those savings pretty rapidly. In fact, lower-income households might have already been forced to use credit card debt to make ends meet. So the longer inflation and interest rates remain high, the more fragile US households become – and the sooner consumers become a source of weakness for the economy, rather than a source of strength.
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