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The pandemic, and its aftermath, brought about a significant economic phenomenon – excess savings. It is widely acknowledged that due to widespread lockdowns, households saved much more than they would have under normal circumstances. However, the exact amount of savings, how much remains, and the implications for the economy remain uncertain.
Our colleague Soumaya Keynes examined various trends in a recent column, ultimately concluding that there is likely not much pent-up demand waiting to be unleashed. If individuals wanted to spend their savings on a cruise, for example, they would have likely done so already. The excess savings might be used to cushion spending in case of a recession, but the likelihood of a sudden surge is decreasing.
While we generally agree with this assessment, we at Alphaville have a particular interest in the narrative instability of recent national statistics releases. Therefore, we wanted to delve into the updated US household savings figures from last week.
The updated figures from the Bureau of Economic Analysis suggest that the US may have higher excess savings rates than previously estimated, due to a lower benchmark for savings. Let’s quickly recap: excess savings are typically calculated as the difference between the amount saved since the pandemic began and the projected level of saving pre-pandemic. A research report from the San Francisco Fed in August estimated the accumulated excess savings above trend at $2.1 trillion, with $1.9 trillion of that already being utilized since savings fell below trend last year. The authors of the report estimated that only about $190 billion of excess savings remained, indicating limited potential for inflation or growth. However, other estimates from JPMorgan, Goldman Sachs, and Fitch Ratings varied significantly, ranging from $400 billion to $1.3 trillion.
The recent data from the Bureau of Economic Analysis may have altered this perspective. The new figures show that monthly saving had been lower than previously assumed even before the pandemic. As a result, the projected level of saving is now lower, making the actual savings appear even more substantial. In other words, the recent undershoot in savings can make the recent figures seem more impressive, even if they have also decreased. The implications of this revision are considerable. JPMorgan responded to the data, stating that the combination of higher recent saving rates and a lower pre-pandemic benchmark suggests there is significantly more excess saving left for households than previously believed. They estimated that around $1.2 trillion of excess savings remained in the second quarter, compared to the pre-revision estimate of $400 billion. This newfound byproduct, worth an additional $800 billion, has caught analysts’ attention.
However, it is important to note that excess savings is not an exact measurement. The San Francisco Fed’s estimate was based on expected savings from 48 months leading up to the US recession in 2020. Others have used different measures, such as a calculation by TS Lombard’s Steven Blitz, which considers cumulative savings from 2012 to 2019. These varying methods yield different results. To provide some context, we attempted to recreate the San Francisco Fed’s figures using their projections. Considering that the recession lasted from February to April 2020, we projected savings from the 48 months leading up to January 2020. Based on our crude calculations, we estimated that there are approximately $690 billion of savings left, with an accumulation of around $2.6 trillion and a drawdown of about $1.9 trillion. This is nearly four times the San Francisco Fed’s estimate and represents a significantly different level of pent-up purchasing power simply due to the revised run-rate.
In summary, national statistics can be tricky to interpret. Measuring savings relative to a trend is a complex task. Those responsible for making monetary policy decisions, such as the members of the Federal Open Market Committee (FOMC), face the challenge of navigating these intricacies. In the end, there is still much uncertainty, and it remains to be seen how these excess savings will impact the economy.
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