American consumers have everyone fooled — even the Fed

The increased saving was driven by both government stimulus payments during the pandemic and a sharp reduction in consumer spending as the economy shut down and Americans stayed home. Yet, by the summer of 2021, Fed economists estimated that surging inflation, increased consumption and the end of government stimulus were leading households to deplete those savings. By mid-2022, a quarter of that $2.3 trillion was gone — or so they thought.

Two essential inputs are required to estimate personal saving. One is how much households “should” have saved and the second is how much they actually saved. The recent government revisions reveal that Fed economists were wrong on both counts. The reason why is that new data indicate that Americans saved less than previously thought in the years leading up to the pandemic, and have saved more than thought during and after the pandemic. Revisions to the earlier years are important because the Fed used the wrong data to calculate how much households “should” have saved.

So, both the level of savings in 2019 and the pace at which those savings grew were lower and slower than the economists estimated. Those two effects amplify each other and suggest that the amount Americans “should” have saved is likely $2 trillion to $3 trillion less than what the Fed economists initially calculated. The Fed’s overestimate was not only massive, but insidious as well. Its analysis made it look like excess savings were being steadily spent down by $150 billion each month, putting households on a spending trajectory that would inevitably end with empty bank accounts and maxed out credit cards.

It's not as if there weren’t signs that something fishy was going on with the data. Although the Fed estimated that savings had been depleted by $2.3 trillion by the second quarter of 2022, total checking account deposits were at an all-time high. Those deposits have since declined by a few hundred billion dollars but remain more than $3 trillion higher than before the pandemic. The Fed analysis  forecasted excess savings would be depleted by August.

The good news goes beyond just households having a larger cash cushion. The fact that excess saving has barely declined means that spending was never as out of whack as we were led to believe. It casts the recent strength in retail sales and increase in credit card balances in a more positive light. If you believed that excess savings were nearly gone but that consumers just couldn’t stop spending, then record credit card debt looks like a looming disaster. But once you see that households still have trillions of dollars in cash, it’s clear that spending and incomes are well matched. Indeed, the rise in credit card balances suggests a consumer that is optimistic about rising incomes.

Optimism is also confirmed by the comprehensive data revision. It reveals that personal income increased more rapidly over the past two years than first reported. Personal income that is both higher and rising faster implies that high levels of consumer debt are a result of people feeling more comfortable making big-ticket purchases that are paid off over time.

Contrary to popular belief, consumers have not been spending beyond their means, depleting their savings, or turning to credit cards in desperation. There is no looming consumer disaster on the horizon and no reason to expect a consumer-led recession anytime soon.

Karl W. Smith is a Bloomberg Opinion columnist. Views do not represent the stand of this publication. Views are personal and do not represent the stand of this publication.

Credit: Bloomberg