Many aspects of daily life were altered during the pandemic, and the spending habits of Americans were no exception. When compelled to stay home, individuals and families in higher income brackets were able to save more money than they had in decades, retaining upwards of 30% of their income in their bank accounts. In fact, the Federal Reserve estimated that as a country, we accumulated $2.3 trillion in excess savings between 2020 and 2021.

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Despite the rosy outlook, those unprecedented levels of savings were challenged rather quickly as we emerged from the health crisis. The Bureau of Economic Analysis reported that by February of 2023, the personal and household savings rate had dropped significantly to 4.6%, nearly half of the average rate that had been sustained for decades. Americans experienced a volatile swing from the highest average savings level to the lowest in just two years.

Some experts worry that the evaporation of household savings could lead to less spending in the near future. As consumer spending represents about 70 percent of the U.S. GDP, a slowdown could severely impact economic growth.

What is Happening with Spending?

With more money in their savings accounts than usual, Americans emerged from the pandemic confident in their spending ability – but their savings are drying up. This fact is prompting leading economists to warn that a recession is likely – and may be closer than we think. Commenting on the reality of rising inflation and stagnant wage growth, Liz Young, head of investment strategy at online bank SoFiYoung, noted in a recent article, “… something’s gotta give.”

Economist Shannon Seery of Wells Fargo noted, “U.S. consumers are saving their income at a lower rate than they were pre-pandemic. This is allowing them to spend more in the near-term, but likely comes at the expense of future growth.” The financial expert anticipates a mild recession in early 2024 unless the labor market strengthens.

In other words, as consumers realize their savings are dwindling, they will stop spending. This will likely usher in the recession we’ve been avoiding with this excess spending behavior. Experts fear that people who have enjoyed elevated expenditures in the last several years will experience a “perfect storm” of adverse economic factors as their savings disappear – leaving them more vulnerable to an economic contraction than they are anticipating given their current situation.

Credit Card Debt is Rising Amid Spending

“American consumers have been actively using their credit cards to navigate costs associated with inflation.” – Melissa Lambarena, NerdWallet

Those in lower income categories already struggle with higher inflation, including rising gas utility and food prices. With savings gone and incomes stretched, Americans are reaching for their credit cards. Credit card debt is very high, and rising interest rates make the situation more difficult for consumers. .

While economists worry this situation will result in a downturn in spending, vulnerable Americans are also likely to fall into debt they cannot easily recover from.

Don’t Be Caught Off-Guard

If you struggle to make ends meet and rely on your credit cards to pay bills, the time to act is now. While many people hold out hope that the labor market will improve, interest rates will drop, or inflation will ease, their own personal financial situation may grow more precipitous by the day.

Richard V. Ellis has helped hundreds of Sarasota residents alleviate financial stress and move forward with a clean slate. If you are overwhelmed and need help, call our offices today to learn more about your options.

Richard V. Ellis is a Sarasota bankruptcy attorney with decades of experience helping families like yours.