Personal excess savings in the U.S. reached extraordinarily high levels during the pandemic, peaking between $2.0 – $2.6 trillion in 2021. That’s equal to 10% of the nation’s gross domestic product. Economists believe these savings helped keep the economy moving during post-pandemic inflation because consumers could use that money to keep spending.

But there’s wide disagreement about how much of these excess savings is left – and what happens when it’s gone. In this episode of Six Hundred Atlantic, Boston Fed economist Omar Barbiero discusses why excess savings matter, why estimates vary widely, and what surprised him when he studied how fast savings were being depleted across income groups.

JAY LINDSAY:

Hi, and welcome to Six Hundred Atlantic. I’m Jay Lindsay, and today our guest is Omar Barbiero. He’s an economist here at the Boston Fed, and he's just co-written a paper with his colleague Dhiren Patki  about the excess savings households accumulated during the pandemic.

Now, excess savings are important for a couple reasons. One is that consumer confidence increases when people feel like they have enough savings. Also, a lot of economists say these excess savings have helped make the economy more resilient during this inflationary period we've been in, because consumers have been able to access this money to keep spending and keep the economy moving. But how quickly are people depleting these excess savings? There’s major disagreement about that. And what happens to the economy when they're gone? These are important questions that Omar’s been thinking about. So, welcome, Omar. Thanks for being with us.

OMAR BARBIERO:

Thank you for having me.

JAY LINDSAY:

So, what exactly are excess savings? My understanding is that, in this situation, they’re simply the amount of savings in excess of what people would've been expected to save if there was no pandemic. Is that correct? Can you help me out here?

OMAR BARBIERO:

Yeah, it's correct. And I agree that it's a bit of a confusing term, excess savings. I'm sure that you and I can agree that there's no such thing as an excess savings. They're never enough. But it's an economic term. It's how an economist, in a sense, would define what has been going on during the pandemic. They are personal savings as measured in an aggregate term for all U.S. households, in excess of a benchmark savings rate. Now, this benchmark savings rate is supposed to represent the long-term savings rate, something that is not dependent on the economic cycle. And then, after we define this benchmark rate, we can just take what is going on right now, and take the difference with this benchmark, and that's going to be the excess.

JAY LINDSAY:

You've defined excess savings for us here, and your paper does look at exactly how they're calculated, the assumptions. But it's clear that, no matter what assumptions you make, these excess savings, they reached extraordinarily high levels during the pandemic. And I'm hoping you can sort of characterize just how high they did get, and why were people able to save so much?

OMAR BARBIERO:

Personal excess savings, computed by us, or many other people, they peaked between $2.0 and $2.6 trillion in 2021. To give a term of comparison, that's roughly 10% of GDP, or Gross Domestic Product.

JAY LINDSAY:

So, people were able to save so much, just because they're not having to spend. Is that why?

OMAR BARBIERO:

Yes. That was one reason. That was what was unique about the pandemic. You didn't go out to restaurants, gas savings, and so on and so forth. I mean, life changed dramatically, and in general, across the income distribution, that implied less consumptions, less expenditure, and so more savings.

And the second reason were the also historically large amount of transfers from the U.S. government to households, in particular the economic impact payments, or stimulus checks.

JAY LINDSAY:

Excess savings are important to policymakers. And I know that some economists say that once that money's gone, consumer spending is really going to fall, it's going to be a drag in the economy. Can you talk about that? That seems like a pretty important thing for our economy. And there may be other reasons you want to bring up, why excess savings matter so much to policymakers.

OMAR BARBIERO:

They matter, I would say, for three main reasons. One, as you said, saving inflows, especially liquid savings, so cash, generally implies higher consumption, and particularly high for low-income groups.

Some commentators, already they're mentioning, and with some right, this incredible amount of excess savings as being one of the causes behind the incredibly resilient U.S. demand. Even though right now we are under a period of monetary policy tightening, consumption still seems strong. So, not only does it matter because of strong consumption, but the flip side of that is that, with stronger demand, there is a higher probability of having inflation in the sectors that people want to spend in.

JAY LINDSAY:

So, I want to be clear I understand that. You're saying that it can fuel inflation in a sense because it fuels pent-up demand.

OMAR BARBIERO:

Yeah, exactly. Finally, we care, because savings are an insurance mechanism for households to navigate hard times. So, to the extent that we may or may not expect a recession coming in the next years, we would like to know how households' finances and balance sheets are faring.

If we expect a recession, and we know that there are no more savings, or these excess savings are not there anymore, or maybe the savings are particularly low, historically, let's say, and we expect a recession, then we also know that the recession will be even worse than we would predict in normal times. Because people will lose their jobs. On top of that, they will not be able to maintain the same level of consumption as before, because they don't have a job. They have to ideally use their savings to consume, but they don't have much of those, and so they will buy just less goods. They have no other choice than buying less things. And because they buy less things, the companies that depend on strong demand will, in turn, fire more people. And those people, in turn, have even less excess savings. And it's kind of like a vicious cycle. And recession amplifies because of it.

JAY LINDSAY:

Thanks for that. And it explains why excess savings is so closely watched. And one thing that you see is that there's a lot of disagreement out there about how much excess savings there is. At the Fed, we have some economists saying the excess savings are all but gone, but others disagree, say there's quite a bit left. And your paper indicates that, as well. It seems like this has a lot to do with whether economists make one of two assumptions in their calculations. This is what your paper addresses. And can you briefly explain that?

OMAR BARBIERO:

This is really the core concept of this paper, and one of the main reasons why we have written it. We wanted to clarify, what are the two main reasons why so many reports differ in computing, today, the amount of excess savings left?

The two main reasons we found out are, first of all, whether they assume that the benchmark savings rate is increasing. The second reason is, okay, now you have decided that you want to keep it increasing or constant. What is the time sample, pre-pandemic, that you're going to take as representative for your estimation of long-term savings, right? What is the time sample representative of a normal period?

Both of these assumptions will make any economists that compute this excess savings reach very different conclusions on the situation which we are, today. In particular, if you assume an increasing savings rate may be estimated between the time period 2018-2019, then you would conclude that excess savings are, today, now completely depleted. If you, instead, assume that the benchmark savings rate is just constant, and estimated between 2016 to 2019, then excess savings are just one-quarter depleted, just 25% depleted right now. And there's still around $2 trillion left.

I think both assumptions have arguments for them, I would say. At the base of this report is the difficulty of using a benchmark of a world that you cannot observe, right? How exactly would the savings rate be if the pandemic didn't happen? We cannot observe that. We can just imagine this counterfactual. I think, at least the merit of this report is to say, okay, we don't know, but there are these two assumptions that you can make. Make up your own mind about what is the most sound assumption, and then judge the report that way.

JAY LINDSAY:

It's not like you could just pick one, and it doesn't make much difference, right?

OMAR BARBIERO:

Yeah, yeah. It's a good point. Statisticians talk about confidence intervals around the estimates. Even though we didn't run exactly a statistical analysis here, but this report is saying that the confidence interval around these estimates of excess savings is just wide right now. And there's just high uncertainty.

JAY LINDSAY:

So, the last thing I want to ask about is something that stands out in the paper, and that is, you've calculated that, under either assumption, excess savings have been depleted at roughly the same rates across all income groups. I'm wondering, did you find that surprising? And can you tell me a little bit why or why not?

OMAR BARBIERO:

So, we wanted to know whether low-income group are depleting savings, today, faster than other groups. And did we find anything surprising? Well, we found that, pretty much across all counties, no matter whether they were low-income counties or high-income counties, everybody was depleting savings more or less at the same rate. And I did find that surprising, for two reasons, I would say.

First of all, I don't know if you heard, there's been some inflation going on. And the inflation we see it, economists see it, as very much of a regressive tax, meaning that it has a stronger bite for low-income groups. A higher amount of income for low-income groups is devoted to consumption, and to consumption for which you have no choice. It's food, so you need to buy it. So, even though prices are higher, you cannot decide, "Okay. I'm not going to eat bread." Right?

Instead, on the higher-income side of the distribution, if luxury cars become much more expensive, somebody can decide not to buy that car, right? So, I was expecting, because of inflation, to see a stronger depletion for low-income households.

Second of all, we know that the pandemic had a stronger impact for professions, for jobs, that were in person. Typically, these in-person jobs are more likely to be for low-income households. So, I was expecting some scarring effects that would continue even after the pandemic. Now, looking at savings, in particular, we don't see much difference between the depletion rates of the savings, between high income and low income. And we don't really know the reason.

JAY LINDSAY:

Would there be implications for policymakers, this finding? Or is it just something that is an anomaly, or at least a surprise, that needs to be studied?

OMAR BARBIERO:

I think it should be studied. I think it's definitely interesting from a policymaker perspective. Yes, trying to find the cause of this can help a policymaker understanding what's going on.

JAY LINDSAY:

Well, thanks, Omar. That's all the questions I have.

OMAR BARBIERO:

Thank you for having me.

JAY LINDSAY:

Omar’s paper is titled, “Have U.S. Households Depleted All the Excess Savings They Accumulated During the Pandemic?” You can find that on bostonfed.org.

You can also check out bostonfed.org/six-hundred-atlantic, where you can listen to interviews like this one, as well as our podcast seasons. And while you’re there, you can also subscribe to our email list to stay up to date on new episodes. And please don't forget to rate, review, share, and subscribe to Six Hundred Atlantic on your favorite podcast app.

I'm Jay Lindsay. Thanks for listening.