The San Francisco Federal Reserve utilizes the term “excess savings” to denote the variance between current savings and the pre-recession trajectory, compared with similar trends observed in past recessions. According to their assessment, approximately $500 billion of this surplus in savings persisted within the broader economy until March 2023. However, by June, this amount had dwindled to under $190 billion. Despite the prevailing uncertainties, the San Francisco Fed projects that Americans will exhaust the remaining surplus savings by the conclusion of the third quarter in 2023.
“The reduction in household savings witnessed an initial gradual pace, which then escalated during 2022, stabilizing at an average monthly decrease of approximately $100 billion,” as highlighted in the report by the San Francisco Fed.
This evaluation follows a recent upsurge in the Consumer Price Index (CPI), a pivotal gauge for inflation, and the Federal Reserve’s 11th interest rate hike within the past year
Inflation Trends Prompt Consideration of Another Interest Rate Hike
While inflation rates have decelerated from their peak of 9.1% in June 2022, the Federal Reserve may uphold its stringent monetary policy until inflation aligns with its target range of 2%. In June, inflation experienced a resurgence, reaching 3.2%. Morning Consult Chief Economist John Leer emphasized, “The more prolonged the period of heightened inflation, the more deeply ingrained it becomes.” Leer further raised the pivotal inquiry regarding the Fed’s tolerance for core inflation exceeding 4%, suggesting a relatively low threshold for tolerance and indicating that rate cuts in the current year are unlikely.
Additional economic indicators also suggest potential rate hikes by the end of the year. Joel Kan, the Vice President and Deputy Chief Economist at the Mortgage Bankers Association (MBA), pointed out, “Job growth is showing signs of weakening, while wage growth remains stable, albeit exceeding the pace consistent with the Federal Reserve’s inflation target.” Kan highlighted the conflicting economic signals conveyed by recent data, including lackluster indicators of manufacturing and service sector health, fluctuations in inflation metrics, stronger-than-anticipated GDP growth in Q2, and persistent resilience in consumer spending. Despite a recent decline in both overall and core inflation rates, market participants emphasized that “inflation remained at an unacceptably high level.” The released minutes of the Fed’s Federal Open Market Committee (FOMC) meeting held from July 25 to July 26 stated that further
compelling evidence was needed to instill confidence that inflation was unequivocally progressing toward the Committee’s 2 percent objective.
Record Levels of Household Debt Amidst Diminishing Savings and High Interest Rates As savings decrease and interest rates remain high, Americans have taken on an unprecedented amount of debt. According to research by the Federal Reserve Bank of New York, Americans accumulated a record $17.06 trillion in household debt during the second quarter of 2023, marking a $16 billion increase from the previous quarter. Notably, credit card balances surged to $1.03 trillion, a significant rise from $986 billion in the first quarter.
The New York Fed’s report highlighted, “Credit cards represent the most prevalent form of household debt and are continuing to proliferate.”
However, for a significant portion of Americans, their incomes have not kept pace with the escalating costs of goods, even as they accrue more debt. A report by TransUnion revealed that 46% of consumers stated their incomes did not match the rate of inflation during the second quarter of 2023. Additionally, 38% noted that their financial situations were worse than anticipated at that point, reflecting a four-percentage-point increase from the previous quarter. Inflation emerged as the primary concern for respondents (79%), followed by the fear of a recession (53%) and escalating housing prices (45%).
TransUnion underscored in its report, “Inflation has put consumers in a mindset akin to a recession.”
Many Americans, particularly those belonging to Gen Z, are increasingly resorting to credit cards to cover surging expenses. According to TransUnion, 50% of Gen Z borrowers, in contrast to 32% of the general population, indicated their plans to apply for new credit or refinance existing credit.
“Michele Raneri, Vice President of U.S. Research and Consulting at TransUnion, emphasized the growing trend of credit card and personal loan utilization among Gen Z consumers as they transition into financial independence. Raneri pointed out that, akin to the wider population, a significant portion of Gen Z borrowers is grappling with the financial challenges exacerbated by high interest rates and inflation. Consequently, they are resorting to these readily available credit instruments to navigate the increasing expenses and the constraints on their monthly financial plans.
