Jeffrey Roach, Chief Economist at LPL Financial, joins TheStreet to discuss why there’s been such a sharp drop for Americans when it comes to savings.
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00:00So let's talk about the savings rate here. Excess savings has shrunk or have shrunk
00:05significantly since 2021. Tell me, what's behind this sudden drop?
00:12Well, of course, part of the fact that prices have been so elevated post-pandemic has drawn
00:18down those savings. But it's not as bad, perhaps, as we might say. So pandemic, this excess savings
00:25was really just a calculus really publicized by the San Francisco Federal Reserve, where it talks
00:32about savings have been over and above the pre-pandemic trend. We pulled all those back.
00:39We're back down to our more normal levels of savings. But you got to remember, there's a
00:44difference between the stock of savings and the flow. At this point, we still see a pullback in
00:52consumer spending that we'll see later this year. That's part of the implications. You asked,
00:56why do we care about savings rates and excess savings? It's certainly going to put a little
01:03more pressure on the consumer as we go through the summertime and going into the third and
01:09fourth quarter of this year. What risk does the shrinking of the excess savings rate,
01:18what risk does that pose for consumer spending?
01:24Yeah, so I think it's important to remember the domestic economy is supported by upper-income
01:30households. And those upper-income households are typically homeowners and so have a little
01:37less pressure on them from rising interest rates. A lot of people locked in very low mortgages right
01:44after the pandemic when interest rates were so low. And so mortgage debt financing costs
01:51or servicing costs are pretty low for that segment. I think we're still seeing really two,
01:59very two different economies, the haves and the have-nots. There's still incredible
02:06pricing pressures on lower income. Yes, the rate of change has slowed. So I'm certainly in the camp
02:12that inflation is decelerating and decelerating enough for the Fed to cut this year. But the
02:18levels of prices still a challenge for many households. Do you expect the change in the
02:26savings rate to start to change consumer habits? And by that, I mean, you know, right after the
02:31pandemic, it was like YOLO, right? Everybody was spending on travel and the only ones that
02:36revenge travel and all these other different words that we came up with. So do we return now
02:41back to kind of like a normal kind of spending pattern where people are not going all out on
02:47trips and on restaurants and they're spending their income mainly on, you know, everyday items?
02:55So we did have somewhat of a spending splurge. Everybody, you know, buying new furniture for
03:01their home office or finally going on that European vacation that they wanted to in years past. So
03:07there was a spending splurge. We do think that some of that demand was pulled forward into 2022,
03:132023, particularly in durable goods purchases. So 2024, latter half of 2024, we're certainly going
03:21to see a little bit of a slowdown. In fact, in the most recent personal income and spending report,
03:27which also gives us the Fed's preferred metric of the PCE deflator, we did see that real spending,
03:33particularly on goods, pulled back and declined. We expect that to happen again, not catastrophic,
03:41but part of it is just because we pulled a lot of that forward
03:44in the years past right after the reopenings, after the global pandemic.
03:51Is there a potential for that pull forward to be so intense that it actually triggers a recession?
04:00Well, that certainly is the debate. You know, at this point, the recession risk is pretty low
04:08because we don't see an ebb and flow as much in the demand for services. So when you think about
04:15your average household and you look over the past several business cycles, the ebbs and flows of
04:22good spending is pretty dramatic. The spending on services is not as volatile. And it makes sense,
04:29it's health care, it's housing, it's food, it's some of these services that you regularly.
04:37And so you're certainly going to see a slowdown.
04:40The risk of recession at this point is very, very low.