Excess Savings Are Gone. Now What?

Key Takeaways

• Consumers have been drawing down excess savings since mid-2021, but as of March this year, excess savings dried up.  
• Excess savings peaked at $2.1 trillion in August 2021, when many households received support via pandemic-related stimulus. Weak spending, especially on services, also contributed to the rise in excess savings.  
• Throughout the more recent spending splurge, households drew down their savings by roughly $85 billion over the past year.  
• Healthy household balance sheets and low mortgage debt servicing will soften the blow. 

No More Excess Savings 

“Excess Savings” has been a hot topic since the pandemic, and it behooves investors to understand this as we go through the latter part of this business cycle. The San Francisco Federal Reserve (Fed) defines excess savings as the dollar amount of savings over and above the pre-COVID-19 trend. Excess savings peaked at $2.1 trillion in August 2021, when many households received support via pandemic-related stimulus. Weak spending, especially on services, also contributed to the rise in excess savings. 

But as households made up for lost time and splurged on both goods and services, excess savings were drawn down. 

Excess Savings Are Now Gone

Source: LPL Research, San Francisco Federal Reserve, Bureau of Economic Analysis 05/08/24

It’s no surprise that consumers have been drawing down excess savings for quite a while now. In fact, excess savings have been shrinking since the summer of 2021 as spending grew faster than real disposable incomes. 

Excess Savings Started Shrinking in Summer 2021

Source: LPL Research, San Francisco Federal Reserve, Bureau of Economic Analysis 05/08/24

But Wait, There’s Hope 

As excess savings dwindle, there are potential risks to consumer spending. When households exhaust these accumulated savings, it could lead to a decline in discretionary spending. Additionally, if the depletion of excess savings is not met with a corresponding increase in income or economic growth, it could potentially dampen the pace of economic growth.  

However, healthy household balance sheets supported by low mortgage debt servicing costs will soften the blow from a smaller stock of savings. The large number of households who refinanced mortgages after the pandemic but before the Fed started raising rates now have an historically low level of mortgage debt service. The extra money saved from lower mortgage costs will likely offset the decline in excess savings. 

Refinancing Provided a Huge Lift for Homeowners

Source: LPL Research, Federal Reserve Board 05/08/24

Call to Action 

Consumer spending is a sizable part of the economic engine, and as we saw from recent earnings reports from companies such as Amazon (AMZN) and Apple (AAPL), the consumer has been supporting economic growth. However, is the spending splurge over?  

A key takeaway is upper-income households still have some tailwinds — one is historically low mortgage debt service. Given the decline in excess savings, investors will consider labor market trends even more closely for any leading indicators of future consumer spending.  

LPL’s Strategic and Tactical Asset Allocation Committee (STAAC) maintains its neutral equity stance tactically. The improved economic and earnings outlook this year has kept the risk-reward trade-off for stocks and bonds well balanced, perhaps with a slight edge to bonds over stocks currently when looking out to year end. Recent stubbornly high inflation readings likely delayed Fed rate cuts and may limit the upside to stock prices over the balance of the year, although two cuts may still come by year end.