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The deflating of the great cash cushion

The writer is a contributing editor to the Financial Times and chief global economist at Kroll

It may be the most predictable recession in history. Economists expect the US economy to contract since at least April, shortly after the Federal Reserve began raising interest rates. But a bit like Judo, she has yet to appear. Trust the cash cushion to American consumers and businesses built during the pandemic. But that will eventually go away, and then the economy will collapse.

In 2020 and 2021, generous benefits for unemployment insurance, stimulus checks and child tax credit payments helped families shed nearly $2.3 trillion in excess savings — more than they would have had it not been for the pandemic. This increased demand as the economy reopened (which added pressure on inflation). October retail sales posted their strongest gain in eight months. Consumption accounts for more than two-thirds of US GDP growth, and spending has remained strong so far.

But with consumer inflation rising to 7.7 percent in October and median wages rising 6 percent, according to the Atlanta Federal Reserve’s wage growth tracker, people’s living standards are falling. With stimulus programs ending last year and the economy reopening – increasing opportunities for money to be spent – Americans’ cash war chest dwindled, and the spending splendor could not last. Economists’ estimates of the remaining amount vary from about $1.2 trillion to $1.8 trillion.

Projections about how long the cash will last also vary, based on assumptions about the labor market, spending and GDP. Bank of America projects that at the current three-month average rate of decline in household deposits, it will take 12 to 40 months (depending on quarterly income) to return to 2019 levels. Goldman Sachs estimates that US households will have less than a trillion dollars in excess savings by the end of 2023. JPMorgan recently warned that excess savings could be completely depleted by the second half of next year.

There are many reasons to get on the pessimistic side of these estimates. The personal savings rate jumped from 8.3 percent at the end of 2019 to 26.3 percent at the peak of COVID-19 in March 2021. In September, it eased to 3.1 percent, well below the historical average. And despite all the cash left in gross household bank accounts, consumers don’t feel very confident. The Conference Board’s Consumer Confidence Index has declined since mid-2021.

Consumer indebtedness is rising, which is another sign that some households are running out of savings. According to the New York Federal Reserve, total household debt increased by $351 billion in the third quarter, the largest nominal increase since 2007. Credit card balances swelled 15 percent from a year earlier, the biggest rise in two decades. And while the delinquency rate — debt more than 30 days past due — on consumer loans and credit cards is still below historical averages, it’s on the rise.

And businesses, like households, have seen cash margins rise above the pandemic thanks to fiscal measures like the Paycheck Protection Program and ultra-easy monetary policy. New orders for non-defense capital goods excluding aircraft — a proxy for capital expenditures — have remained on a strong upward trajectory since April 2020, suggesting that businesses are still happy to spend.

But with borrowing rates still high and profits likely to wane, this cannot go on forever. Cash on hand for businesses is still well above pre-Covid levels, but has fallen sharply since the third quarter of 2021. Surveys indicate that companies large and small are cutting back on capital investments over the next few months, another sign that they are feeling pressure on their finances. despite their monetary status.

It’s a must-watch feedback loop. If companies are holding back, fewer people will be drawing paychecks. Historically, spending decisions have been based more on business opportunities than on savings. The United States has a very narrow job market, possibly affected by savings stock demand. Unemployment rates have increased only marginally from their post-pandemic low of 3.5 percent. Average hourly earnings growth slowed from 5.6% in March 2022 to 4.7% in October, still well above the historical average. But as the Fed raises interest rates to lower demand, the job market will deteriorate.

In the coming months, the cash war chest will dwindle, profits will suffer and unemployment will rise. Godot never came around, but stagnation will happen, sooner or later. Whether it’s a soft landing or a hard landing, there will be a much thinner cash cushion to hold on to.


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