Don't Worry About Depleted Excess Savings

Last Edited by: LPL Research

Last Updated: May 10, 2024

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Jeffrey Roach:

Hi, I am Jeffrey Roach, chief economist for LPL Financial, with an update on what's happening in the global markets and the call to action for investors. First, excess savings are gone, but don't worry, consumers have been drawing down excess savings really since mid-2021, but as of March this year, excess savings have dried up. Excess savings peaked at over 2 trillion in August 2021 when many households received support via pandemic-related stimulus, and consumers weren't spending as much on services back then, which contributed to that rise in excess savings. By the way, excess savings is just the difference between actual savings and the pre-recession trend. Second point here, is excess savings has been declining since mid-2021, and it's no surprise that consumers have been drawing down those excess savings for quite a while now, as spending grew faster than real disposable income. As excess savings dwindle, there are potential risks to consumer spending.

Jeffrey Roach:

When households exhaust these accumulated savings it could lead to a decline in discretionary spending. Plus, 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. But wait, there's hope. Third point here is this, refinancing provided a huge lift for homeowners. Healthy household balance sheets supported by very low mortgage debt servicing costs, I think will soften the blow from a smaller stock of savings. The large number of households refinanced mortgages after the pandemic, but before the Fed started raising rates. Well, they have a historically low level of mortgage debt service. The extra money saved from lower mortgage costs, I think will likely offset the decline in excess savings. So what's the punchline here? A key takeaway is this, upper income households still have some tailwinds, and one is the historically low mortgage debt service. Given the decline in excess savings, investors should consider labor market trends even more closely for any leading indicators of future consumer spending. Well, that's all for now, and if you want more insights on global market trends, follow us on social media and take care.

In this edition of the Econ Market Minute, Jeffrey Roach, Chief Economist for LPL Financial, shares his insights into the depletion of excess consumer savings. He points out that consumers have been drawing down savings since mid-2021, the potential decline in discretionary spending, and how refinancing has been a boost to homeowners. 

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