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Americans are draining the money they saved during the pandemic

Pandemic savings have helped keep people spending even as inflation has spiked. But their stockpiles are increasingly dwindling.

An image of a cute round piggy bank with a blue mask over its little mouth and snout. Bita Honarvar/Vox; Getty Images
Madeleine Ngo covers economic policy for Vox. She previously worked at the New York Times, the Wall Street Journal, Bloomberg, and the Philadelphia Inquirer.

Keith Miller, a technician at an air compressor plant in Connersville, Indiana, was able to build his savings for the first time during the pandemic — he had about $16,000 stored away at one point last year.

Miller, 48, said he was working extra hours since orders at the plant had increased early in the pandemic. Stimulus checks and extra child tax credit payments from the federal government also helped Miller cover necessary expenses for himself and his 8-year-old son, allowing him to save.

But the plant cut back his hours more than a year ago, and the federal government stopped sending out expanded child tax credit payments at the end of last year. At the same time, many necessities have become more expensive, including Miller’s monthly rent and milk at the grocery store. Miller said he went from having extra money in his account to being worried about making ends meet, and he’s now about $700 behind on paying his electricity bills.

“I honestly don’t have any savings. It’s gone,” Miller said. “If things keep getting worse, I don’t know what we’re going to do.”

Miller isn’t alone. Many Americans piled up their savings during the pandemic after lawmakers passed rounds of stimulus measures to prop up the economy, and as households spent less on travel and other in-person events. But with many stimulus programs over, excess savings are quickly dwindling as inflation has spiked and stretched people’s budgets. And even though a strong labor market has led to fast wage growth, inflation has outpaced those gains.

Beyond making life more difficult for people struggling to afford basic essentials like food and housing, the drop in savings is worrying because it comes at a precarious time. Economists are growing increasingly concerned about a potential recession next year as the Federal Reserve raises interest rates to bring inflation under control. Consumer spending is key to ensuring economic growth, making up about two-thirds of GDP. But with pandemic savings dwindling, many Americans might not be able to or choose not to spend as much as they have been during the recovery, which could further slow the economy.

Pandemic savings are draining away in many households

Estimates of excess savings vary, but according to data from Bank of America, Americans still have about $1.2 trillion in extra savings, which is down substantially from a peak of more than $2 trillion last year. The personal saving rate also dropped to 2.3 percent in October, down from this year’s peak of 4.7 percent in January and 7.3 percent a year before.

Consumers built up their savings throughout the first two years of the pandemic, ending 2021 with a “huge amount of savings,” said Diane Swonk, the chief economist at KPMG. Those extra savings helped keep consumers spending and led to a more resilient recovery, even as inflation has eaten into many people’s budgets.

Earlier in the pandemic, lawmakers passed several relief packages to stimulate the economy, which included direct checks for individuals, expansions to unemployment insurance, and hundreds of billions in aid to state and local governments. Congress also passed expansions to the child tax credit, which gave families up to $3,600 per child and helped lift millions of children out of poverty.

Chris Wheat, the president of the JPMorgan Chase Institute, said household checking account balances were significantly higher directly after families received federal stimulus payments, with balances among lower-income families up more than 100 percent around the middle of last year compared to 2019.

Checking account balances have since come down, especially those belonging to lower-income and Black and Hispanic families. The most recent data through June showed that checking account balances among lower-income families were still higher than they were before the pandemic, but up about 50 to 60 percent from 2019 in comparison, Wheat said.

Consumers started to drain their excess savings this year as prices shot up substantially for things like groceries, gas, and rent, Swonk said. And although total excess savings haven’t entirely depleted, that extra cushion is gone for many families. The lowest quintile of households depleted their excess savings halfway through the year, Swonk said. An October research report from the Fed found that households in the top half of the distribution held a large majority of excess savings, which totaled about $1.35 trillion in the middle of this year. Lower-income households typically spend a larger share of their budgets on necessities like food and housing, meaning that inflation has cut into their savings more.

“What little we have left by the end of the year will be in the top-income households, which have less of a propensity to spend out of savings because they have income,” Swonk said. “The cushion on savings has dwindled quite dramatically for those who need it most.”

Some economists say excess savings may not help boost spending much next year as the Fed continues to raise interest rates, which will likely slow the economy further.

The Fed is intentionally trying to cool consumer demand by making borrowing money more expensive, which should eventually lead to slower price growth as people spend less. But by doing so, the Fed risks going too far — if businesses respond by hiring fewer workers or even laying them off, that could lead to a spike in unemployment. That could also result in lower incomes and fewer savings.

Excess savings might not provide much of a cushion next year

Michael Gapen, the head of US economics at Bank of America, said extra savings — along with higher wages from a strong labor market — have helped keep consumers spending and the economy expanding. But excess savings are falling by about $100 billion each month, and upper-income households now hold about 60 percent of those savings, according to Bank of America estimates.

That might not provide much of a cushion for the economy next year, since excess savings can quickly turn into “precautionary saving,” Gapen said, meaning that consumers who have extra savings could still pull back spending because they’re more nervous about their job security or the general state of the economy. That could also push the saving rate up.

“That’s kind of when the game is up for the recovery,” Gapen said. He added that it was “more likely than not” that the country would tip into a recession next year as the Fed raises interest rates, although he said it was unclear how drastic or long a recession might be.

There are still some reasons to believe that the current level of excess savings could continue to prop up the economy. The upper 20 percent of households typically account for about 80 percent of spending in leisure and hospitality, a sector that was severely constrained during the pandemic, Gapen said.

“You could argue the money’s exactly on the balance sheets of the households that are most likely to engage in that spending,” Gapen said. “It means the recovery could go on longer.”

But there’s no guarantee that high earners will continue to spend that money, said Greg McBride, the chief financial analyst at Bankrate. Higher-income households that are sitting on more savings are still spending in a “very robust way,” but that could change as the economy continues to slow, McBride said.

“We’ve certainly seen a sharp decline in financial markets this year. If you started to see a meaningful retreat in home prices, that could certainly do it, or a substantive rise in unemployment,” McBride said. “Any of that could prompt even higher-income households to clutch the pocketbooks tighter and cut back on spending.”

Lower and middle-income households that have been burning through extra savings at a faster rate also won’t have much to fall back on as the economy weakens, which could further hurt spending, McBride said.

Whether a recession comes or not, there is a growing unease among many Americans, even as some have more money than they did pre-pandemic. McBride noted that a Bankrate poll released in June found that 58 percent of Americans were uncomfortable with the amount of emergency savings they had, up from 48 percent last year and 44 percent in 2020.

Some Americans have started cutting back spending now to stock up their savings ahead of a potential economic downturn.

Cassie Williams, 38, a licensing specialist at an advertising firm in Farmington, Michigan, said she makes nearly $20,000 more annually now compared to the job she had before the pandemic started. Because of her new job, it has become easier to set aside money — Williams said her family has more than $1,000 in their savings account.

But Williams said they’re no longer receiving expanded child tax credit payments, and everything seems to have become more expensive. Williams, who has a 6- and a 2-year-old child, said she is “making sure we’re not living above our means,” and their family has cut back spending on things like dining out in order to save more.

“Just because your job situation is stable today doesn’t mean that some external factor can’t come in and completely mess it up tomorrow,” Williams said. “We are prioritizing saving because we know that stuff happens.”