Decrease in savings and losses of credit card companies

The Federal Reserve's latest study shows that Americans, with the exception of the richest 20%, now have less savings than they did at the start of the pandemic. Their cash and bank balances are lower than in March 2020. The balance of all income groups has declined from a peak in 2021, but the richest 20% still have about 8% more savings than before the pandemic. In contrast, the poorest 40% have experienced an 8% decline and the middle 40%, corresponding to the middle class, have recently seen their savings fall below pre-pandemic levels.

Risks of economic downturn

This decline in U.S. consumer savings, whose resilience has fueled economic growth, signals potential risks of economic downturns. The Federal Reserve Bank of San Francisco predicts that excess savings will run out this quarter. Despite this, household net wealth saw a $5.5 trillion increase between April and June due to gains in homes and stocks, with the wealthy benefiting disproportionately. Corné van Zeijl also discussed this phenomenon at us in the podcast last July.

Financial households are on an unusual trajectory post-Covid, with large-scale government support and forced austerity during lockdowns leading to additional savings, allowing for a rapid recovery, which may now be losing momentum.

Historically high debt and expected losses for credit card companies

In addition to the fact that U.S. consumers' savings are now depleting, U.S. credit card companies are suffering losses on a scale not seen in nearly 30 years, with the exception of the periods of the financial crisis. Losses were lowest in September 2021 but have increased rapidly since then, with an increase similar to the 2008 recession. Goldman Sachs predicts that this trend is far from over.

Current losses stand at 3.63%, up 1.5 percentage points from the low, and are expected to increase by another 1.3 percentage points to 4.93%. This increase in losses is occurring while Americans' credit card debt exceeds $1 trillion, an all-time high according to the Federal Reserve Bank of New York.

Continuation of defaults and spikes in losses

Analyst Ryan Nash foresees defaults continuing to lag and does not predict losses to peak until late 2024 or early 2025. Interestingly, these losses are amplified outside of a recessionary period. Nash compared the current cycle to those of the mid-'90s and 2015-2019, noting that losses typically peak six to eight quarters after the spike in loan growth. 

The combination of rapidly declining savings and rising debt signals potential for further economic problems and financial instability for both consumers and financial institutions.

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On behalf of Holland Gold, Paul Buitink and Joris Beemsterboer interview various economists and experts in the field of macroeconomics. The aim of the podcast is to provide the viewer with a better picture and guidance in an increasingly rapidly changing macroeconomic and monetary landscape. Click here  to subscribe.  

Sources: 

CNBC
Bloomberg