The substantial excess savings cushion accumulated since 2020 due to generous fiscal assistance during the pandemic is nearly exhausted. As households no longer have a solid financial buffer to support their spending and debt repayment, consumer spending will likely weaken over the coming quarters, toppling the U.S. into a short and shallow recession likely beginning in the second quarter of next year.

Aggregate excess savings following recession
Trillions, months since start of recession

Line graph of aggregate excess savings follow recession from 1970-2020, showing significant decline in 2020

Source: Bloomberg, Principal Asset Management. Data as of June 30, 2023.

Unlike during the Global Financial Crisis (GFC), today’s household balance sheets are in reasonably good shape. Generous pandemic-related fiscal support injections and reduced spending opportunities during lockdowns contributed to a significant build-up of excess savings to around $2 trillion. As the economy re-opened, households dipped into this war chest of savings to fund their purchases (reducing the need for credit card spending) and to pay down their debts.

The difference between the post-pandemic and post-GFC periods (as well as other recessions) is stark. Post-GFC, households were considerably more cautious with their spending, gradually building up savings as they tried to repair their balance sheets. By contrast, the significant increase in excess savings has fueled consumer spending in the current cycle and helped prevent a surge in household indebtedness.

However, the various support structures for households are now starting to expire. Pandemic-related fiscal support is ending, and with only an estimated $0.23 trillion left, much of the excess savings cushion has now been exhausted. By early 2024, many households will likely be exposed to the full burden of higher interest rates.

Consequently, consumer spending should start to weaken over the coming quarters, tipping the U.S. into recession (albeit shorter in duration, and of shallower magnitude than recent recessionary episodes) likely beginning in 2Q 2024.

Read more about the recession outlook and how to prepare portfolios for this evolving environment in our Midyear perspective 2023: A short and shallow recession.


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