Will the Depletion of Excess Savings Necessarily Affect Consumption?

Recently, a San Francisco Fed research estimated that a relatively small amount of excessive savings—around $190 billion—remains in the overall economy, and the aggregate stock of excess savings will likely be depleted during the third quarter of 2023. This has caused the market to worry about whether consumption will face headwind. However, we found that there are still some supporting factors for consumption, whether in the short term or in the long term.

■ Wages are currently rising faster than inflation

For more than two years, persistent and pervasive inflation has taken big bites out of Americans' paychecks. However, that's finally starting to change now that inflation is waning. Non-farm hourly wages grew by 4.36% year-on-year in July, while CPI grew at 3.2%.

We can also see signs of improvement in residents' purchasing power from the recovery of the residents' savings rate. The household savings rate edged back up to 4.3 percent in July, up from a low of 2.7 percent last year.

The broader labor market trends, including hiring activity, labor movements and businesses' budgets are favorable to workers maintaining these real wage gains. Job growth is slowing somewhat, but the gains are still above pre-pandemic averages.

The growth of residents' real income partly explains why the net profit of the S&P 500, especially the consumer industry, exceeded expectations in the second quarter.

■ Rate hike does not affect consumption in all sectors

We can see from the chart below thatnot all types of consumption will be affected by the Fed's interest rate hike. Only consumption related to housing and automobiles that involved borrowing money experienced a month-on-month decline in July this year, while consumption in the food and beverage, store retail, and medical and personal care sectors still saw strong growth.

■ Long-term demographic factors boost consumption growth

Compared with other developed economies, the US demographic profile gives reason for relative optimism.

A recent HSBC report noted, “Its slightly younger population, higher birth rate and elevated rate of immigration means that the demographic backdrop for potential growth looks more favorable than for most European or developed Asian economies, albeit not as robust as for the smaller population.”

In 2023, the modal age of the US population is 32, with a few small bumps in the population at later ages. But over the course of the next decade, as this cohort gets older, the population pyramid starts to look less supportive at younger age groups, because of the aforementioned drop in births.

The ageing effect is reasonably supportive of growth, with the large number of people concentrated around their early 30s today becoming 40-something over the next decade. With spending rising with this ageing path, this could support overall demand in the economy, particularly with this large cohort.

US spending on healthcare is clearly correlated with age. One other impact of ageing relates to home ownership. It's very rare for under 25s to own homes in the US, but as people age from 25 to 45 that ratio rises quickly as households have been able to accumulate enough funds for a down payment and incomes are high enough to support mortgage payments. This process may be slower in the coming years because of higher interest rates, but the shape of the US population pyramid is still supportive of home demand for the foreseeable future.

In general, we may see some rotation in spending, as spending on health (due to aging) and recreation and restaurants (due to preferences) increases more quickly as incomes continue to rise. This suggests that the rotation of spending towards many discretionary services may be structural in nature.