Excess savings have shrunk significantly since 2021, Jeffery Roach, chief economist at LPL Financial, explains why.
Transcript:
CONWAY GITTENS: So let’s talk about the savings rate here. Excess savings has shrunk or have shrunk significantly since 2021. Tell me what’s behind this sudden drop?
JEFFERY ROACH: Well, of course, part of the fact that prices have been so elevated post pandemic has drawn down those savings. But it’s not as bad, perhaps as we might say. So pandemic, this excess savings was really just a calculus really publicized by the San Francisco Federal Reserve, where it talks about savings have been over and above the pre-pandemic trend. We pulled all those back. We’re back down to our more normal levels of savings. But you’ve got to remember, there’s a difference between the stock of savings and the flow. At this point. We still see a pullback in consumer spending that we’ll see later this year. That’s part of the implications. You asked why do we care about savings rates and excess savings. It’s certainly going to put a little more pressure on the consumer as we go through the summertime and going into the third and fourth quarter of this year.
JEFFERY ROACH: Yeah so I think it’s important to remember the domestic economy is supported by upper income households and those upper income households are typically home owners. And so have a little less pressure on them from rising interest rates. A lot of people locked in very low mortgages right after the pandemic when interest rates were so low and so mortgage debt financing costs or servicing costs are pretty low for that segment. You know, I think we’re still seeing really two very two different economies, the haves and the have nots. There’s still incredible pricing pressures on lower income. Yes, the rate of change has slowed. So I’m certainly in the camp that inflation is decelerating and decelerating enough for the Fed to cut this year. But the levels of prices still a challenge for many households.
CONWAY GITTENS: Do you expect the change in the savings rate to start to change consumer habits? And by that I mean, you know, right after the pandemic, it was like yolo, right. Everybody was spending on travel. And you only live once and revenge travel and all these other different words that we came up with. So do we return now back to a normal kind of spending pattern where people are not going all out on trips and on restaurants and they’re spending their income mainly on, you know, everyday items?
JEFFERY ROACH: So we did have somewhat of a spending splurge. Everybody, you know, buying new furniture for their home office or finally going on that European vacation that they wanted to in years past. So there was a spending splurge. We do think that some of that demand was pulled forward into 2022 and 2023, particularly in durable goods purchases. So 2024, the latter half of 2024 we’re certainly going to see a little bit of a slowdown. In fact, in the most recent personal income and spending report, which also gives us the Fed’s preferred metric of the PCE deflator, we did see that real spending, particularly on goods pulled back and declined. We expect that to happen again, not catastrophic, but part of it is just because we pulled a lot of that forward in the years past, right after the reopenings, after the global pandemic.
CONWAY GITTENS: Is there a potential for that pull forward to be so intense that it actually triggers a recession?
JEFFERY ROACH: Well, that certainly is the debate. You know, at this point, the recession risk is pretty low because we don’t see an ebb and flow as much in the demand for services. So when you think about your average household and you look over the past several business cycles, the ebbs and flows of goods spending is pretty dramatic. The spending on services is not as volatile. And it makes sense, right. It’s health care, it’s housing, it’s food. It’s some of these services, insurance that you regularly. And so you’re certainly going to see a slowdown. The risk of a recession at this point is very, very low.
CONWAY GITTENS: What risk does the shrinking of the excess savings rate, what risk does that pose for consumer spending?
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