After reaching an all-time high during the pandemic, the household savings rate in the US now sits at 2.4 percent, the lowest level since 2005 and the second-lowest rate going back more than 60 years.

It were the consumers who kept the economy moving amid the high demand generated by the pandemic and additional purchasing power in 2022. Thus spending, adjusted for inflation, was above 2021 levels, says the Bureau of Economic Analysis.

There were many challenges – supply chains in disarray as result of lockdowns in China, Russia’s invasion of Ukraine, gas prices higher than $5 per gallon for the first time ever, higher inflation since the early 1980s, and soaring interest rates, the consumers remained resilient.

Spending remained resilient throughout much of 2022 but a high inflation has taken its toll and knocked the stuffing out of the financial cushion. With interest rates poised to go higher in 2023 and economic uncertainty sure to grow, consumers could be starting to run dry at the worst time.

Purchasing power has shrunk

According to CNN, Americans’ personal savings rate reached an all-time high during the pandemic as many locked-down workers saved on the cost of their daily commute and other expenses. Consumers also benefited from government checks meant to stimulate spending. But the high inflation and interest rates mean things have changed as we reach the 2022-end.

Household financial obligations (debt) as a percentage of disposable personal income hit an all-time low of 12.57 percent in the first quarter of 2021, according to Federal Reserve data. That share has now ticked up to 14.49 percent, well below average rates of the past 40 years, as consumers lean more on credit cards and other borrowing.

Moreover, credit card delinquencies remained near historic lows with a 2.07 percent as of September 30. However, that rate is higher than the previous quarter and was reached at the fastest pace on record, according to Fed data going back to 1991.

Auto loan delinquencies, which fell to the lowest level since 2003, are revving up to pre-pandemic levels. However, those delinquencies are climbing faster than they have during those nearly 20 years.

The average monthly payment for a new car was $703 in the third quarter, up nearly 26 percent from 2019, according to Edmunds.com.

Pandemic aid combined with a drastic curtailing of consumer spending during the height of the pandemic allowed people’s savings accounts to balloon. Fed economists estimated that between 2020 and through the summer of 2021, US households accumulated $2.3 trillion in savings in excess of pre-pandemic trends. Consumers have been draining those coffers to an estimated current range of $1.2 trillion to $1.8 trillion, according to JPMorgan Chase.

“That trillion and a half dollars will run out some time mid-year next year,” JPMorgan Chase CEO Jamie Dimon told CNBC earlier this month, noting that inflation is “eroding” the pile of savings.

2023 outlook not good

Gregory Daco, EY Parthenon’s chief economist, the main engine of US growth — the consumer — is still running, but three key factors suggest it will lose considerable steam. Firstly, the soft income trend will weaken further in 2023 on softer compensation and employment growth. Secondly, the savings dip is unprecedented and unsustainable. Third, the credit splurge is a true risk, especially for families at the lower end of the income spectrum.

EY Parthenon projects that consumer spending will flat line in 2023 after growing 2.7 percent this year. Persistent inflation, tighter financial conditions and weaker global growth could help tip the United States into a mild recession during the first half of the year, Daco noted.

“With household sentiment historically depressed and savings cushions rapidly dwindling, consumers will likely grow increasingly reluctant to spend in coming months,” he wrote. “This will become more apparent as labor market conditions deteriorate and household wealth takes a hit from falling stock prices and declining home values.”

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