The economy has run out of dry powder as inflation has slashed excess household savings, investment firm says

For most Americans, inflation has eaten away at excess savings from the pandemic. That spells trouble for the US economy.

• The US economy doesn't have any dry powder left as inflation has eaten through household savings.
• Cash savings as a percentage of total consumption have returned to 2019 levels for most Americans.
• Consumer spending could start to pull back, pushing the economy into a slowdown, experts warn.

The dry powder of cash savings that was expected to cushion the economy has run out, as inflation has practically wiped out US households' excess savings, according to an analysis from Bespoke.

Consumers built up "huge cash balances" during the pandemic, partly due to a pullback in spending as well as government-issued stimulus checks. That cash was thought to be a buffer to the slowing US economy, giving consumers some leeway to keep spending despite tightening financial conditions.

But those expectations are actually misplaced, the investment firm said in a note, as inflation has eaten away the spending power of household savings for most Americans.

Though households nominally have a higher amount of savings than they did before the pandemic, that picture changes when looking at cash savings as a percentage of total consumption, which factors in the added pressure on consumers from rising prices. 

When counting money market and deposit assets as a percentage of total consumption, most Americans have the same amount of savings they did in 2019.

Money Market + Deposit Assets, % of Total Consumption, Change From 2019 Average (%)

"For all but the highest earning and most wealthy households … cash holdings relative to consumption are basically back to where they were in 2019. In other words, there is no dry powder of cash left to fund consumption growth," the firm said. "That's especially true given the fact that the highest and wealthiest consumers are not cash-constrained for consumption in the first place."

Consumers have been flashing other signs that their financial health is starting to deteriorate. Credit card debt hit a fresh all-time high last year. Meanwhile, student loan payments have restarted after a three-year hiatus, meaning it'll be difficult for many to pay keep paying bills while maintaining a robust pace of spending.

A slower pace of spending could spell trouble for the US economy, which still faces a decent risk of recession in 2024. A pullback in spending could result in a consumer-led slowdown, Macquarie strategists said in a November note.