Sure, Consumers' Savings Are Down, But So Is Their Debt

Even with elevated consumer prices and high borrowing costs, Americans continue to spend at a solid clip, complicating the Federal Reserve’s efforts to tame inflation. One reason that central bank officials cite for this phenomenon is the “excess savings“ accumulated during the pandemic, which are the byproduct of fiscal relief such as the stimulus checks and foregone spending when the economy was shuttered. So, it’s of great interest to the Fed to figure out when those savings run out and consumers are forced to cut back on their spending.

New research from Federal Reserve Bank of San Francisco economists Hamza Abdelrahman and Luiz Oliveira concludes it’s happening now. They tracked savings relative to the pre-pandemic trend and found that it peaked in the summer of 2021 at $2 trillion, then fell steadily. But it's a mistake to think of excess savings as just more money sitting in the bank; it is also about having less debt. And those with a lot of debt are more interest-rate sensitive. That’s who the Fed should keep a closer eye on.

There are several signs that households hold less debt than the pre-pandemic trend, including some very high-interest debt. Payday loans declined 65% during the first year of the pandemic, according to the Consumer Financial Protection Bureau. The growth in credit-card balances also fell early in the pandemic, according to the Federal Reserve Bank of New York. That lowered debt servicing costs, freed up money for spending and made many consumers less sensitive to increases in interest rates.

Delinquency rates are another sign that consumers have been managing their debt better even as interest rates rise. During the pandemic, delinquencies on credit cards fell to their lowest in the 20 years of the series. That was true of all consumer loans. Even now, with the Fed’s target federal funds rate and consumer interest rates notably higher, the delinquency rate on credit cards has only just returned to its pre-pandemic level.

Research on stimulus checks directly connects the extra income with paying down debt. In my research with a survey of households on the 2021 checks, the most common use (45%) was paying down debt and then savings (31%). The least common use was to increase spending (24%). Note that the aggregate increase in spending is still substantial, given how large the payments were. Credit-card debt was the most common debt that was paid down, but payday and auto title loans, among others, were also mentioned. The pattern in uses was similar for the stimulus checks in March 2020. Adding the three rounds of stimulus checks together, an eligible family of four received $11,400, which would have allowed for a substantial debt reduction.