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A major part of the “no landing” thesis (aka when the economy continues to grow despite a series of contractionary monetary policies) is based on the idea that U.S. consumers were frothing with spending power – courtesy of the government and Federal Reserve via COVID stimulus.

To give you some context: after COVID-19 began, governments around the world pushed an ungodly amount of money into the system within a brief period.

  • For instance, in the U.S. alone, the Treasury injected roughly $7 trillion through various programs – such as three rounds of direct stimulus checks, unemployment benefits, PPP (business) loans, food stamps, and many others.
  • Meanwhile, the U.S. Fed aggressively eased financial conditions by pumping over $4.7 trillion into the banking system through zero interest rates, asset purchases, repo operations, and much more.

Thus, both the U.S. Treasury and Fed were stomping on the gas – which spurred some of the worst inflation we’ve seen since the 1970s.

Not very shocking, right?

But it gets worse when you realize how both the Federal Reserve Chairman Jerome Powell and U.S. Treasury Secretary Janet Yellen preached that all this spending wouldn’t create any inflation.

  • “I really don’t think that’s going to happen [inflation spiraling],” Yellen said1 on MSNBC [2021]. Inflation before the pandemic “was too low rather than too high,” she noted. “If it turns out to be inflationary, there are tools to deal with that,” she said of the stimulus package.
  • “Our best view is that the effect on inflation will be neither particularly large nor persistent,” Jerome Powell said[2021]. And if it does pick up in a more concerning way, “we have the tools to deal with that,” he added.

It’s like both the nation's top economic authorities were reading off the same cue cards. . .

But I digress.

The point is, four years later, households still had a significant amount of spending power because of all this stimulus. And this has carried both the economy and inflation even in the face of high interest rates.

But, according to the latest data, the cracks in the U.S. consumer are widening.

Let’s take a look at some of this. . 

The Excess Savings Are Gone – What Happens Now?

You may be wondering, “What does excess savings mean?”

Well, according to the Fed, excess savings is defined as “savings accumulated when the household savings rate is above” the pre-COVID trend.

  • Basically, how much extra money individuals had in their bank accounts post-COVID.

In August 2021, excess savings reached a peak of $2.1 trillion, buoyed by pandemic-related stimulus support to numerous households. Additionally, subdued spending, particularly in the services sector amid lockdowns, further bolstered excess savings.

But after three-plus years of consumers spending more than they were making, this excess has evaporated. And is now actually $72 billion below the pre-COVID trend, according to the San Francisco Federal Reserve.

I believe this has two important implications:

  • First off – drawing down the excess savings was a boon for the economy because it fueled spending – by $2.1 trillion worth. Remember, if people aren’t saving, then they’re spending (and vice versa). Thus, this drawdown allowed consumers to spend far more than their incomes justified (and this doesn’t even include the additional 25% increase in outstanding credit card debt4 since Q4/2019). But, alas, now that it’s gone (and even negative), it indicates households won’t be able to depend on this savings cushion any longer. Or at the very least, can’t spend in excess.
  • Secondly – if it was the U.S. consumer who carried growth since COVID ended, then any slowdown in excess spending will potentially hurt the economy.

    This could cause a feedback loop: less spending means fewer sales, which may trickle into less business investment/expansion and hiring, which means further less spending and fewer sales, and on and on.

Thus, what goes up must come down.

The drawdown in excess savings was once a boon. But now with it gone, it’ll likely pose a serious headwind – and it’s happening at a pretty troubled time as consumers are looking increasingly fragile.

Consumers Appear Stretched Thin at This Point

Over the last year, we’ve seen consumers rack up larger and larger balances using Buy Now Pay Later (BNPL) schemes – which is becoming a type of “phantom debt” since we don’t really know how much of this is outstanding and none of it is shown on credit scores (how nice).

For example - according to the latest Harris Poll survey5 - over half of the respondents utilizing BNPL services acknowledged that it enabled them to "buy beyond their means", with a quarter admitting their spending through BNPL was "out of control."

Furthermore, Harris's study revealed that 23% of users relied on split payments because they couldn't afford most of their purchases outright - while over a third turned to these services after reaching the limits on their credit cards.

The research also indicates that the BNPL spending surpasses $1,000 for over a third of users and isn't solely spent on high-value purchases. Nearly half of BNPL users have either used or contemplated using it for essential expenses - such as bill payments and grocery shopping.

Worse is that about 42% of those with household incomes of more than $100,000 reported being behind or delinquent on BNPL payments.

Meanwhile, according to the recent Federal Reserve Bank of Philadelphia report6 – as of December 2023, approximately 3.5% of card balances were overdue by at least 30 days – marking the highest percentage recorded in the data series dating back to 2012 and rising roughly 30 basis points from the previous quarter (quite a noticeable increase).

Thus, consumer credit is showing signs of cracks at a time when excess savings have run out.


And my guess – for what it’s worth – is things will get worse from here.

Wrapping It Up

So, let’s recap.

First households had a pile of excess savings – over $2.1 trillion worth – as of August 2021 thanks to the government's COVID stimulus.

Meanwhile, households have shoveled on credit card debt (roughly $300 billion – or a 25% increase) since December 2019.

  • Keep in mind this doesn’t even include auto loans, mortgages, student loans, etc.

Then BNPL schemes became the next tool for consumers to continue borrowing - which is estimated7 to hit over $80 billion outstanding by the end of this year.

And while all this excess savings and debt fueled demand (aka someone's spending is someone else's income), the other shoe is now dropping.

The excess savings are now gone (even negative vs. pre-pandemic). Credit card debt can’t rise much further as delinquencies are soaring to decade highs. And BNPL usage shows consumers are stretched thin.

Call me skeptical, but it’s a pretty inconvenient time for excess savings to run out.

But as always, time will tell. . .




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