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The recent state of the US economy has made it difficult for Americans to save, but savings accounts have shrunk dramatically over the past two years. Jeffrey Roach, chief economist at LPL Financial, joined TheStreet to explain why and whether he sees a change on the horizon.
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Full video transcript below:
Conway Gates: So let’s talk about the savings rate here. Excess savings have shrunk or decreased significantly since 2021. Tell me what is behind this sudden decline?
Jeffrey Roach: Well, of course, part of the fact that prices are so high post-pandemic has reduced those savings. But it’s not as bad as we might say. So, because of the pandemic, these excess savings were really just calculations that had already been published by the San Francisco Fed, where they talked about savings being higher than the pre-pandemic trend. We pulled all of those back. We have returned to our normal savings levels. But you have to remember that there is a difference between savings and flow stocks. at this point. We still see a decline in consumer spending that we will see later this year. This is part of the effects. You asked why we care about savings rates and excess saving. It will certainly put more pressure on the consumer as we go through the summer and into the third and fourth quarters of this year.
Conway Gates: What risks does a shrinking excess saving rate pose, and what risks does this pose to consumer spending?
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Jeffrey Roach: Yeah, so I think it’s important to remember that the local economy is supported by high-income families, and those high-income families are typically homeowners. So there will be a little less pressure on them from rising interest rates. A lot of people locked into very low mortgages right after the pandemic when interest rates were very low and so mortgage debt financing costs or servicing costs are very low for this sector. You know, I think we’re still seeing two very different economies, the haves and the have-nots. There is still incredible pricing pressure on low incomes. Yes, the rate of change has slowed. So I’m definitely in favor of inflation slowing down and slowing enough that the Fed can lower it this year. But price levels remain a challenge for many families.
Conway Gates: Do you expect that the change in the savings rate will begin to change consumption habits? And by that I mean, you know, right after the pandemic, it was like Yolo, right. Everyone was spending on travel. And you only live once and you travel with revenge and all these other different words that we came up with. Are we now back to a normal spending pattern where people don’t go all out on trips and restaurants and spend their income mainly on everyday items?
Jeffrey Roach: So we had kind of overspending. Everyone, you know, is buying new furniture for their home office or finally going on that European vacation they’ve wanted to take in years past. So there was wasteful spending. We believe some of this demand has been postponed into 2022 and 2023, particularly in durable goods purchases. So, in 2024, in the latter half of 2024, we’ll definitely see a little bit of a slowdown. In fact, in the latest Personal Income and Spending report, which also gives us the Fed’s preferred measure of the contraction in personal consumption expenditures, we saw that real spending, especially on goods, declined and declined. We expect that to happen again, not catastrophically, but part of it is because we’ve done a lot of that forward in the past years, right after the reopening, after the global pandemic.
Conway Gates: Is there a possibility that this progress will be so strong that it will actually lead to a recession?
Jeffrey Roach: Well, that’s certainly the debate. You know, at this point, the risk of recession is very low because we don’t see a huge ebb and flow in demand for services. So when you think about your average household and you look at the past several business cycles, the ebb and flow of spending on goods is very interesting. Spending on services is not volatile. This makes sense, right. It’s health care, it’s housing, it’s food. They are some of these services and insurances that you perform regularly. You will almost certainly see a slowdown. The risk of recession at this point is very low.
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