Economic Letter from the Federal Reserve Bank of San Francisco titled "The Rise and Fall of Pandemic Excess Savings"

Economic Letter from the Federal Reserve Bank of San Francisco titled "The Rise and Fall of Pandemic Excess Savings". Here is a summary of the key points:

1. **Excess Savings During Pandemic**: U.S. households accumulated savings at unprecedented rates during the pandemic due to the strong fiscal response and lower consumer spending. Despite recent rapid drawdowns of these funds, a substantial amount of excess savings still remains in the aggregate economy.

2. **Savings Across All Income Levels**: Since 2020, households across all income levels have held a historically large share of savings in cash or other easily accessible forms. These funds could potentially support personal spending at least into the fourth quarter of 2023.

3. **Fiscal Support and Savings**: Pandemic-related fiscal support led to a significant increase in disposable income in the U.S. economy at a time when health-related economic closures and social distancing led to a significant drop in household spending. As a result, aggregate personal savings rose rapidly, far beyond its pre-pandemic trend and much higher than in previous recessions.

4. **Excess Savings Post-Pandemic**: Despite a rapid drawdown of savings in recent months, there is still a large stock of aggregate excess savings in the economy—some $500 billion. These excess savings could continue to support consumer spending at least into the fourth quarter of 2023.

5. **Fiscal Spending and Excess Savings**: The fiscal response to the onset of the pandemic was swift and significant. Between 2020 and 2021, the federal government launched several stimulus packages that injected about $5 trillion into the U.S. economy.

6. **Household Savings Across Income Distribution**: Estimates suggest that households in the two lowest groups in the income distribution hold between 4% and 29% of the total stock of excess savings, while the highest income group holds between 32% and 67%.

7. **Conclusion**: The aggregate stock of excess savings is expected to continue to support consumer spending at least into the fourth quarter of 2023. However, this outlook is uncertain and depends on factors such as whether households have developed a preference for higher savings, significantly shifted their spending patterns, or substituted other sources of income for the expired pandemic-era cash inflows.

Source: The Rise and Fall of Pandemic Excess Savings | San Francisco Fed (frbsf.org)