By: Michael Guckes, Senior Economist on June 15th, 2022
Savings Rate & Total Savings Deposits
In Difficult and Unprecedented Times Knowledge is Power
The reverberating and long-run effects of the immediate actions taken by world leaders during 2020 and afterward were always going to be difficult—if not impossible—to foresee. However, 2022 is certainly the leading year in which many of the unanticipated consequences of those decisions have come to the fore.
The incredible uniqueness of this present time makes it vastly more difficult for anyone to attempt to predict the economy’s future. The range of predictions being publicized by highly recognized CEOs, hedge funds, and economists is far more disparate than at any time in the recent past. For every expert predicting a near-term recession, there is another arguing for no recession at all, to say nothing about those making predictions for everything in between.
Despite the wide range of predictions, there is one metric that many—myself included—are watching carefully because of the substantial power it has over the future trajectory of the economy and that is gross savings. In each of the first four months of 2022, real (inflation-adjusted) wages measured year-on-year fell. The latest reading for April registered a real income decline of 6.2%. The only way that consumers can offset such a decline is by tapping their savings which is exactly what they have been doing.
Both the level of available savings and the rate at which people are saving has fallen fast since mid-2021. From June 2021 to April 2022 the savings rate fell from 9.5% to 4.4% and gross private savings fell by 10% or $625 billion. The latest April reading recorded gross savings at $5.4 trillion, nearly $700 billion dollars above pre-COVID-19 levels.
Today’s persistent and rising inflation, which is sapping the purchasing power of wages, leaves consumers generally speaking with two options: they can either maintain a constant standard of living by more quickly spending down their savings, or they can tighten their purse strings in an attempt to make their savings last. However, attempts to significantly slow their spending now and prolong their savings will also bring raise the odds and quicken the timing of the next recession.
It is for this reason that business leaders should be watching what happens to both wages and savings in the coming months as only the combined activity of both can provide sufficient narrative for how the 70% of the US economy which is consumer spending will affect the timing of any future recession. Both metrics can be monitored for free through the Federal Reserve Bank of St. Louis’ FRED.