(Bloomberg) — US consumers are still spending like it’s 2021 — but that will soon change as they run out of cash, according to a report from the Brookings Institution.
(Bloomberg) — US consumers are still spending like it’s 2021 — but that will soon change as they run out of cash, according to a report from the Brookings Institution.
Real income growth has slowed to levels below the pre-pandemic trend, according to the report published Tuesday by Wendy Edelberg, director of the Hamilton Project, and Sofoklis Goulas, a fellow at the Brookings-led think tank. Meanwhile, consumers kept their spending habits from a couple of years ago, when forced inactivity and Covid government support payments bolstered their savings.
Much of that wealth gained since 2019 dissipated by the first quarter of this year, the authors said. Meanwhile, personal consumption rebounded in June — adjusted for inflation— by the most since the start of the year, according to data from the Bureau of Economic Analysis.
“If households were to sustain their current spending trends and increasingly finance spending with borrowing, financial health could deteriorate in a worrying way,” the analysts wrote.
Households saw “remarkable” gains in real wealth early in the pandemic, as personal savings rates soared to above 30% during the pandemic lockdowns — when the US government provided billions in fiscal support. But since then, those savings rates have plummeted to 4.6% in May and as low as 3% last year, near a historic low, the report showed. A stock market retreat and weaker income growth ate into the initial wealth gains, and the deterioration in finances was faster for nonwhite and lower income households.
Household real wealth surged to about $15 trillion during the current business cycle that began in 2019, but had been as high as $27 trillion at the end of 2021. And while households in the top income quintile gained nearly $300,000 in wealth on average since the pandemic began, those in the bottom quintile gained about $8,500, the report data showed.
American spending strength confounded the analysts.
The trend “is surprising given the weakness in real income, weak consumer sentiment, moderate gains in wealth since 2019, and increasing debt obligations,” they wrote.
They caution that households will likely see increased difficulties servicing debt and covering basic household needs.
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