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U.S. consumers could be forgiven for thinking they’ve rarely been more strapped for cash than in 2023: inflation is still high, the Fed has hiked up rates, and fiscal support from the government is beginning to run dry.
However, Bank of America’s analysis paints a different picture, highlighting robust spending growth and relatively high household deposits compared to 2019.
The resilience of consumer spending has surprised economists and may have even caused a headache for the Fed—which in a bid to wrestle down inflation has had to push consumers to the “point of pain” with the highest rate levels in more than a decade.
However, signs of a spending slowdown are emerging, with Deloitte forecasting a drop in growth from 2.8% in 2022 to 1.9% this year. Bank of America suggests this slowdown might be linked to the public’s perception that their financial situation has deteriorated somewhat during 2022-23.
The analyst note released on Wednesday points to a study from the University of Michigan, which asked consumers to evaluate their financial well-being by comparing their current situation to both the prior year and five years ago.
When comparing their finances in 2023 to 2018, the public generally thought they had got better off. But when compared to this time last year, respondents said they actually thought they were worse off.
It’s a figure reflected by a recent study from the Bipartisan Policy Center (BPC) which reported that a third of people said they were doing worse financially than a year ago, compared to only one-quarter who said they were doing better.
The Bank of America analysts suggest this is reasonable, writing: “A key reason people are finding their financials under pressure is likely to be the impact that high inflation has had on people’s spending power and their perception that a given amount of dollars no longer stretches as far.
“Additionally, the rise in interest rates have impacted some households’ borrowing costs.”
Bigger buffers
However, although consumers feel their dollars aren’t going as far as before, Bank of America points out that consumers “still appear to have significantly more cash in their checking and savings accounts than before the pandemic.”
Indeed, according to internal Bank of America data, across all income cohorts in July 2023, the median checking and savings account was 54% higher than the average in 2019.
So consumers may feel their finances are worse off—even if they have relatively more in savings—because they’re not saving at the same levels.
Bank of America points out: “Savings and deposits have come down from their peak in the first half of 2021.
“Lower and middle-income groups saw the biggest percentage rise in their buffers relative to before the pandemic but have seen the largest decline in their balances since then.”
Time to forget lockdown?
Savings goals will feel all the more pinched when compared to the pandemic, a time when people were locked in their homes unable to spend their usual budgets on eating out, commuting, traveling and more.
According to the Fed, U.S. households accumulated about $2.3 trillion in savings in 2020 and through the summer of 2021, which was “above and beyond what they would have saved if income and spending components had grown at recent, pre-pandemic trends.”
As a result, Bank of America suggests that the fact consumers are drawing down on their lockdown reserves is more telling of the public’s financial outlook than the fact savings are still at higher levels than before the pandemic.
The analysts point out that savings and checking accounts are “very fluid” and are often tied to day-to-day spending, adding: “As such, what people view as the appropriate amount of these balances will likely depend in the medium term on how much they earn and spend.
“As people earn and spend more, they are likely to want to run higher savings balances, both to cover ‘rainy day’ contingencies and to support their standards of living when they draw upon their savings.”
Ultimately, Bank of America said it does expect to see spending from lockdown reserves—or ‘YOLO’ spending, as it was dubbed by Wharton Professor Jeremy Siegel—diminish into 2024, adding: “The exact timeline determined in part by how deposits evolve relative to income, inflation and of course how consumers feel about the economic outlook more broadly.”
