Depleted Savings are the Achilles' Heel of the US Economy

A Bloomberg column points out that if a company burns through almost all of its cash flow every month, no one would be optimistic about its future. But this is the reality for American households after Trump's return to the White House. Tariffs push up inflation, and conflicts with Iran raise energy prices, with household finances being squeezed on both fronts.

The personal savings rate fell to 2.6% in April, the lowest level since the first half of 2022. If it slides by about 0.5 percentage points more, it will touch the historical low range on the eve of the financial crisis, which was about twenty years ago. The current inflation rate of 3.8% is the highest in nearly three years, and the proportion of nominal consumer spending on gasoline and energy surged to 2.4% in April, the highest since 2023. At the same time, real average hourly wages have fallen over the past 12 months, and several indicators of consumer confidence have declined in tandem.

Consumers are still maintaining spending for now, but the support sources are undergoing a qualitative change. Data from the New York Fed shows that the proportion of credit card balances overdue by more than 90 days has risen to 13.1%, the highest since 2011, indicating that an increasing number of households are relying on debt to sustain consumption. Another support force is the stock market wealth effect - the AI craze has significantly inflated the paper value of 401k accounts, leading some consumers to the illusion that their retirement savings are already adequate.

The historical pattern is quite clear: instances where the savings rate was consistently below 4% have only occurred on the eve of the bursting of the dot-com bubble, from 2005 to 2008 on the eve of the financial crisis, and in 2022. The common backdrop for the three times was an overheated asset market, where the wealth effect temporarily compensated for income shortfalls - but none of them lasted long, ultimately ending in recession.

The Bloomberg Economic Research team pointed out that the savings rate in April was affected by a one-time reduction in agricultural subsidy programs, and the data may be underestimated. The baby boomer generation entering the peak retirement period and consuming previously accumulated savings on a concentrated basis is also part of the explanation. However, these technical factors do not change the underlying trend: the savings rate has continued to decline over the past year, and the buffer space in household finances is disappearing.

Stock market prosperity can cover up the risk of declining savings rates for a considerable period of time, but this is meaningless for the low-income group without stock assets and is also unsustainable at the macro level.