Much like their Canadian counterparts, U.S. households built up their savings dramatically during the pandemic, and new research from the U.S. Federal Reserve indicates those households still have a war chest on hand to deal with rising prices.
According to the report, prepared by Fed staff, the large government transfers to support incomes coupled with the decline of spending due to public health restrictions caused household savings to soar during the pandemic.
“We estimate that U.S. households accumulated about US$2.3 trillion in savings in 2020 and through the summer of 2021, above and beyond what they would have saved if income and spending components had grown at recent pre-pandemic trends,” the report said.
This year as the government supports expired and high inflation emerged, the savings rate dropped below its pre-pandemic level, the report said.
It estimates that households have drawn down about one-quarter of the excess savings, leaving about US$1.7 trillion on hand.
While the majority of the excess savings went to wealthier households, the researchers also estimated that households in the lower half of the income distribution — which are harder hit by inflation — still have about US$350 billion in excess savings, representing about US$5,500 per household on average.
“Our estimates suggest that households across the income distribution continue to have a buffer of excess savings to help them navigate higher prices and/or a tightening cycle,” it said.
“While this buffer is dwindling, for now it is likely still providing some needed balance sheet support that could help to stanch a negative feedback loop were the economy to slow,” it concluded.
Similar findings have been reported in Canada.