(Bloomberg) -- Inflation has sapped 40% of Americans of their pandemic savings, making consumer spending even more reliant on the job market.
Generous government stimulus payments and lock-downs that kept people at home led to “windfall” savings, Stephen Stanley, chief US economist at Santander US Capital Markets, said in a research note Monday. How much of it remains has been a moving target, with economists upping their estimate of pandemic-era savings last month after earlier saying it was nearly gone.
By Santander’s count, much of it still remains at least in nominal terms. Bank deposits and money market balances are up by 51% over 2019 levels for the top 1% of Americans by income, and up by 14% even for the bottom 40%, the bank said, citing Federal Reserve data.
However, adjusting for inflation takes out a huge bite, with liquid assets among that bottom 40% cohort now down 1% compared with the pre-pandemic period. Stanley pegs the inflation rate at 15% over that period, based on the government’s Personal Consumption Expenditures index.
“The prevailing narrative is that households were presented with a windfall during the pandemic and proceeded to spend like drunken sailors until the money ran out,” Stanley said. Instead, “Unfortunately, households have seen their beefed-up nest eggs get eaten away by inflation over the past two years.”
Consumers’ lack of buying power helps explain poor consumer confidence, he said, with the University of Michigan’s consumer sentiment index sitting at a six-month low. Whether they continue to spend or cut back deeply depends even more on the labor market and income growth, Stanley said.
Worker pay didn’t keep up with inflation in 2021 and 2022, but workers enjoyed real disposable income gains of 4% in the first three quarters of this year. Stanley sees real consumer spending rising by a slow 1% in 2024 because of the effects of inflation and higher interest rates.
--With assistance from Alex Tanzi.
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