Excess pandemic savings are better thought of as a component of household wealth, which remains far above trend and can continue to fuel consumption. Financial savings do not all just sit in a bank account, but can be used to purchase assets that appreciate in value. The excess pandemic savings of households are only a small part of an overall boom that has kept household wealth far above trend. The wealth boom was broad and also strongly felt by less wealthy households, who hold the bulk of their net worth in real estate. This post reviews the how excess savings is calculated, shows how real estate appreciation created a broad wealth effect that supported consumption, and suggests economic weakness is unlikely amidst widespread asset price inflation.
Savings is calculated as income not consumed and is not a good measure of potential purchasing power. During the pandemic households had both higher incomes from pandemic stimlus and less opportunity to spend their income, so their savings increased significantly. This excess savings phenomena was seen throughout the world, and particularly salient among higher income households as they tended to spend more travel and dining. After lockdowns, households in effect drew down their excess savings by spending more and saving less. Some research suggests that households have exhausted their excess savings and will soon cut back on their spending.
Income saved becomes wealth, which is not static and has grown significantly over the past few years. The surge in excess savings coincided with a massive boom in asset prices, which remain significantly above pre-pandemic levels. Households likely spent some of their savings on assets, which helped push up asset prices, household wealth, and thus potential household purchasing power. For example, a saver who used $100 in savings to buy NVDA stock in 2020 has seen that stock triple and can now sell it to finance much more consumption than his initial $100 in savings. Note that the level of bank deposits held by households is largely a function of Fed balance sheet policy and does not say anything about the level of household savings or wealth.
The wealth boom was felt beyond the wealthiest households because it included a surge in real estate prices, which is the primary store of wealth for most households. National home prices have risen about 50% since 2019 and appear well supported amidst lack of investory and demographic demand. In the U.S., the wealthy hold the bulk of their wealth in financial assets and the less wealthy hold the bulk of their wealth in real estate. Around 66% of households own a home, which is the single largest asset for the less wealthier half of households. Houseprice inflation thus disporportionately benefits lower wealth households, who tend to have higher marginal propensities to consume.
Household equity in real estate is a few trillion above trend, in part explaining persistent consumption growth. Research indicates that the wealth effect from home price appreciation is much more impactful on consumption than financial asset appreciation. As of 2023 Q1, aggregate household equity in real estate is around $10 trillion higher than 2019 and remains above trend despite a recent decline. This could support consumption by giving households a stronger sense of financial security, or through cash-out refinancings. Cash-out refinancings rose to post-GFC highs in 2021 but have likely declined significantly with rising mortage rates.
The growth in the stock of wealth in recent years completely dwarfs any measure of excess savings and suggests that households can continue to maintain consumption. The growth in household wealth over 2023Q1 alone is over $3t and the continual rise in equities prices and home prices indicate that 2023Q2 will also show strong wealth gains. This does not even include rising wealth from rebounding cryptocurrencies, which is outside of the Fed’s data and could be hundreds of billions.
The continual rise in excess wealth completely off-sets potentially dwindling excess savings and provides significant financial support. Growth and inflation looks to continue its string of upside surprises as long as asset prices remain elevated.
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