During the Covid-19 pandemic, consumers saved an unprecedented amount of cash thanks to government stimulus and draconian lockdowns. As we’ve been detailing over the past year and a half, those savings could soon be exhausted.
WSJ cited new Goldman Sachs estimates that show 35% of the extra savings accumulated during the pandemic was exhausted last month. By the end of the year, Goldman expects those savings to be drawn down by 65%.
WSJ spoke to folks in some households that have already depleted their savings.
Germ?n Vazquez, a 34-year-old freelance photographer in Philadelphia, said his savings swelled during the pandemic thanks to a combination of spending less while cooped up at home and government financial supports, including stimulus checks and unemployment assistance. His balance grew from $4,000 in early 2020 to $20,000 in early 2022.
Over the past year, it dwindled to $2,000. “I’ve never had the opportunity to have that much money saved in my life, so it almost felt like I failed at something,” Mr. Vazquez said of the comedown.
Mr. Vazquez said his balance dropped last year once government financial supports were withdrawn, inflation rose and his business slowed as fewer people opted to spend on photo shoots of themselves and their families.
By the end of 2021, a combination of government pandemic stimulus and reduced spending allowed Americans to amass $2.7 trillion in extra savings. Now there’s just one problem, and something we’ve outlined over the past year and a half, that savings have quickly disappeared.
David Mericle, Goldman Sachs’s chief U.S. economist, explains why:
“At the exact same moment you lost the government transfer payments, you got hit with very high inflation, which made your real spending power lower.”
Mericle had some good news for consumers:
“You shouldn’t need to tap your wealth as much, hopefully, in 2023 as you needed to in 2022 in order to avoid a big decline in your real consumption level,” he said
Besides draining savings, a vast majority of Americans loaded up on credit card debt to supplement their incomes.
Mericle said savings are shrinking quicker for low-income folks.
Recall the savings crisis Americans are experiencing as real wages have been negative for 21 months has been widely discussed by us. We noted in November that it could be 9 to 12 months before the bottom falls out for consumers. And we even said Bureau of Economic Analysis’ savings data might not have been so accurate after all, leading us to believe, just like Goldman, the consumer is about to come to a screeching halt.