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Resources | Market Trends | September 28, 2023

Will the Consumer Disappear as Pandemic’s Excess Savings Dry Up? 

The extra money that households stockpiled during the crisis is probably gone — or will be soon. 


The extra money that households stockpiled during the crisis is probably gone — or will be soon. 

During the pandemic, households in developed countries amassed unprecedented amounts of “excess savings” — savings above and beyond what they otherwise would have held back. In many nations, it was believed to be the equivalent of nearly 6% of GDP

Part of those savings came from government assistance. Some people stockpiled cash as a precaution because they didn’t know how bad things were going to become. In some cases, the public saved more because they didn’t really have a choice. Thanks to lockdowns or shortages, it was impossible for many consumers to purchase everything they wanted or needed. 

Post-pandemic, consumers have been digging into those savings — at about $100 billion per month in the US, according to researchers from the Federal Reserve.

Those funds have helped cushion some consumers from rising inflation and higher interest rates. Others have used the money to satisfy pent-up demand from the pandemic and supply chain disruptions, allowing consumers to take long-delayed vacations or buy household goods that weren’t available before.

But what happens when the money runs out? Without excess savings as a backstop, will consumers cut back on spending, and could that raise the economy’s risk of recession?

When will excess savings be depleted?

Researchers disagree on the exact timing, but many economists are forecasting that all the excess savings generated during the pandemic are either gone or will be soon. 

The Federal Reserve Bank of San Francisco, for example, projects that all US excess savings — which hit $2.1 trillion at one point — will have been used by the end of the third quarter, though it said there was considerable uncertainty. The Fed estimates there was about $190 billion left in June. (Some researchers say that US excess savings have already been depleted.)

Sweden is in a similar spot because it never locked down during the pandemic. As a result, its population was never in a “forced savings” situation.

Other advanced economies have more savings in reserve, but the Fed says they will probably stop using those funds for personal consumption by the end of 2023. The UK and Canada, which have excess savings closer to 10% of GDP, might last longer. 

Signs of slower consumer spending

When households have burned through all their surplus savings, several experts expect that will lead to weaker consumer spending overall. 

According to a recent Bloomberg survey, for example, more than half of investors see US personal consumption cooling off in early 2024. About 21% think it could happen during the fourth quarter of this year. 

If consumption does trail off, that could be a problem because consumer spending is a major driver of economic activity and growth. Consumption ultimately leads businesses to offer services or develop products. It may be one of the main reasons why the US has been able to dodge a severe recession.

European households also built up a stockpile of savings — about $1.1 trillion, Oxford Economics estimated in May — but haven’t spent the money as quickly as Americans have. That may be because those funds are tied up in illiquid assets. 

There are already signals that different markets are either seeing slower spending or could experience it in the near future: 

As a developing market, India is in a different situation. It built up roughly $200 billion in pandemic-related excess savings, but its economy is growing so quickly that personal consumption will continue to expand. 

In fact, its consumer market is expected to become the world’s third largest by 2027, up from fifth place currently. 

Why we can’t count consumer spending out just yet

Not everyone thinks consumer spending is going to fade out right away, at least in the US. Increases in household income could give households the wherewithal to keep buying. 

“We think 2024 is going to be a little weaker, but we’re still expecting about 3% real disposable household income growth,” Goldman Sachs chief economist Jan Hatzius said of US consumers. “If that’s right, or even if that’s anywhere close to right, then it’s very difficult to see declines in real consumer spending.”

And in PNC’s most recent survey of small and midsize US businesses, 77% of respondents were optimistic about their businesses, a 21-year high. 

The picture is different in Europe, where inflation remains higher and growth expectations aren’t as strong. Even so, the UK has experienced higher wage growth (in spite of growing unemployment) and a pickup in business optimism.  

The bottom line about excess savings and consumer spending

Consumer spending is an important driver of economic growth. If it enters a slowdown, then businesses of all sizes will have to confront some serious questions and decisions. 

If you’re a supplier, you may need to prepare for lower orders from buyers, which may also push for lower prices, longer terms or alterations in the product — such as a shrinkflation-version of your current offering. 

That could also mean pausing your growth efforts or finding ways to reduce current expenses. Take a closer look at your sources of working capital — which should include C2FO — and make sure you have the ability to access cash to cover any shortfalls or even push ahead with investments in your business.

Keep in mind: Over the last two years, enterprise buyers have been forced to deal with unexpected drops in consumer demand. Remember when your local stores had to slash prices because they over-ordered inventory last year? 

Thanks to that experience, they may be better equipped to handle a drop in consumer spending now. Accordingly, their suppliers might be in a safer position, too, just with slightly lower growth. 

It’s a good idea to have a conversation about these questions with your contacts at your buyers’ companies. Preparation and data are the keys to managing a volatile situation.

Need access to working capital solutions that can help you navigate surprises in the marketplace? Click here to learn more about C2FO’s suite of supplier finance solutions.  

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