I braved Black Friday and the following Saturday to do some shopping. Observations were made. For example, big box stores have horrible floor management. One store didn’t display the items I wanted to review. Their process was to have customers stand in line at the online order pickup station. The company would then allow me to ask the representatives about the product options they had stored in the warehouse (presumably away from would-be shoplifters?).
While waiting in line, I prepared for the anticipated conversation by looking up the different product versions on my smartphone. In the time it took to get to the front of the line, I could have already ordered the gifts online from the comfort of my couch and had them delivered to my doorstep. I suspect that’s a business decision to keep customers out of their brick-and-mortar stores.
That’s not sarcasm. Online sales for this company represent 43 percent of its revenues, and it has announced that it intends to increase that percentage. They might succeed this year; overall online sales for Black Friday 2023 were up 2.3 percent year-over-year to a record $9.12 billion. (Thanksgiving Day 2023 online shopping is up 2.9 percent year-over-year to $5.29 billion). Still, the store was packed. That bodes well for a strong holiday shopping season.
I had a more favorable shopping experience at local mom-and-pop stores in Berkshire County, which treated customers as special. It was more of a struggle to find the inventory of specific sizes or the latest versions of the most popular products, but it can be done. The owners and managers I spoke with said the lean inventory wasn’t a supply-chain issue. Per the Global Supply Chain Pressure Index (see the chart below), supply chain pressures are close to their lowest level in nearly two years.
Local small businesses wanted to avoid risking overextending themselves in a bad economy. However, to the good fortune of these companies, the volume and flow of customers seemed solid. I take notice of not only foot traffic but also shopping bags. After a couple of tough years of seeing Amazon delivery people more frequently than our neighbors, it appeared that mild weather and excess savings brought out the shoppers.
Did I just say, “excess savings?” How is that a thing?!
I told you that you had too much money about a year and a half ago. Well, if not “too much,” then more cash than usual. I explained that before the COVID-19 pandemic, U.S. households typically held a predictable ratio of checkable deposits relative to the GDP. That ratio was about 10 percent. Given that the U.S. GDP was about $21.4 trillion at the time, we should have expected the amount of checkable deposits to be about $2.14 trillion.
Massive amounts of fiscal stimulus in response to the pandemic put cash directly in the checking accounts of American citizens. In March 2021, I reported that instead of $2.14 trillion of savings, Americans held about $3.7 trillion, or $1.6 trillion of “excess savings.”
As we are aware, the U.S. economy is enormous. The current U.S. GDP is $25.66 trillion. Calculations are often revised, as is the case here. Revised data tell us that instead of excess savings of $1.6 trillion in March 2021, excess savings reached $2.16 trillion. Before peaking at $2.29 trillion by the third quarter of 2021. The Federal Reserve now estimates excess savings have dropped to $1.7 trillion. (Big banks, like JP Morgan Chase and Goldman Sachs, estimate the amount to be in a range that is around that amount to a half trillion-dollars less).
That’s still a lot, but it’s disappearing quickly.
As Americans get out to travel and shop, their savings rate has been plunging. In 2019, before the pandemic, households had saved 8.8 percent of their disposable income. In 2020, that savings rate nearly doubled to 16.8 percent, the highest rate on record. In 2021, the savings rate cooled to 11.8 percent. As the world reopened in 2022, the savings rate plunged to below four percent for seven straight months. In September 2022, the savings rate was 3.1 percent, near its lowest level since the 2008 Great Recession.
Generally, a low savings rate can be a sign of financial distress. It’s likely less of an overall red flag today, given the excess savings rate. But it is more discomforting for lower-income households. The $1.7 trillion of excess savings is disproportionately distributed; $1.35 trillion belongs to families in the top half of income distributions, and the lower half only has $350 billion.
(There are other ways to measure savings, such as the personal savings rate as a percentage of disposable income. That has also fallen off a cliff.)
The COVID-19 fiscal stimulus payments helped more than one million Americans open bank accounts. But now, with inflation running at 7.7 percent year over year, it’s harder for that group to pay bills on time. The average American household is spending $433 more a month to buy the same goods and services it did a year ago, according to Moody’s Analytics.
In the Financial Health Pulse 2022 U.S. Trends Report, more than half (55 percent) of Americans are “financially coping” (as opposed to “financially healthy,” which is defined as spending less than what they earn, paying bills on time, and having sufficient savings). Fifteen percent of Americans describe themselves as “financially vulnerable.”
The National Energy Assistance Directors Association reports that more than 20 million U.S. households were 30 to 90 days late paying their utility bills. And credit card debt rose to $887 billion in the second quarter of 2022. That is up 13 percent year over year, the largest annual increase in 20 years.
The people in the upper quintiles of income are still doing well but are spending down their excess savings on travel and luxury items. The households in the lower half have no choice but to spend the excess to keep up with inflation.
So how long can households expect to hold onto those excess savings? The consensus of the Fed’s numbers and prominent bank economists tells us that the excesses will be wrung out of the system in nine to 12 more months. All other things equal, that expectation suggests the U.S. economy has a tailwind going into the first, maybe second, quarter of 2023. Then look out below.
Allen Harris is the owner of Berkshire Money Management in Dalton, Mass, managing more than $700 million of investments. Unless specifically identified as original research or data gathering, some or all of the data cited is attributable to third-party sources. Unless stated otherwise, any mention of specific securities or investments is for illustrative purposes only. Advisor’s clients may or may not hold the securities discussed in their portfolios. Advisor makes no representations that any of the securities discussed have been or will be profitable. Full disclosures here. Direct inquiries to Allen at AHarris@BerkshireMM.com.
