A recent study reveals that US consumers have amassed $4.3 trillion more in liquid financial assets than before the pandemic. Despite the depletion of surplus savings amassed through pandemic relief funds, American consumers still have strong purchasing power. This suggests that the slowdown in inflation may be slower than expected due to strong demand.
According to a research note from Yardeni Research, founded by Wall Street veteran Ed Yardeni, US consumers held a total of $17 trillion in deposits and money market funds (MMF) as of the end of last year. This is $4.3 trillion more than the pre-pandemic level at the end of 2019, which was $12.7 trillion.
The baby boomer generation (born between 1946 and 1964) held the most liquid financial assets, amounting to $8.2 trillion. Yardeni predicts that “consumer spending will remain high as the baby boom generation, who have finished paying off college tuition and mortgage loans, spend a significant portion of their assets. With positive employment and real wage growth, consumers will continue spending.”
This research by Yardeni Research suggests that even as surplus savings are depleted, consumer spending may not slow down. According to a recent Federal Reserve Bank of San Francisco report, Americans’ surplus savings peaked at $2.1 trillion in 2021 and were depleted entirely by March of this year (-72 million). Although the total reduction in surplus savings is about $2.2 trillion, consumers’ liquid financial assets have increased by $4.3 trillion, meaning their purchasing power has increased. Yardeni stated in the report, “Consumers are still flush with cash. Even if surplus savings are zero, liquid assets are at an all-time high.”
This suggests the US economy could take off again in the second quarter. According to the GDPNow model from the Federal Reserve Bank of Atlanta, the current forecast for US Q2 GDP is an annualized 4.2%. The San Francisco Fed stated, “Even though surplus savings are depleted, as long as conditions that can maintain consumption habits, such as employment improvement, wage increases, and asset growth, continue, the possibility of a sharp decline in consumption is not high.”
This implies a burden from an inflation perspective. Demand will not quickly decline as purchasing power is high. Jerome Powell, Chairman of the Federal Reserve (Fed), stated at an event in the Netherlands, “We didn’t expect it to be smooth, but inflation is higher than people expected. Considering the indicators for the first three months of this year, confidence in the outlook for inflation slowdown is not as high as before.”
The Producer Price Index (PPI) for April, announced by the Department of Commerce, signaled that inflation is still unstable. The April PPI rose 0.5% month-on-month, exceeding the market forecast (0.3%). The year-on-year PPI growth rate jumped from 1.8% in the previous month to 2.2% in April. The core PPI growth rate, excluding volatile food and energy, recorded 0.4%, double the expected figure. Bill Adams, a senior economist at Comerica, evaluated, “Inflationary pressure on the US economy is still significant.” However, revising the PPI growth rate for March from the original 0.2% to -0.1% is a positive aspect. Chairman Powell reserved his judgment on the PPI index, stating, “There are mixed aspects (both positive and negative).”
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