The financial reserves of the majority of American households, excluding the top 20% in terms of wealth, have significantly decreased since the onset of the pandemic, according to a recent study by the Federal Reserve. The study, published on Monday, revealed that bank deposits and other liquid assets for these households were lower in June this year compared to March 2020, after accounting for inflation.
The decline in balances has been observed across all income groups from their highest point in 2021. However, households in the top one-fifth have managed to maintain their cash savings at a level approximately 8% higher than when the pandemic started. In contrast, the bottom two-fifths experienced an 8% decrease during the same period. The middle 40% of American households, often considered the middle class, saw their cash savings fall below pre-pandemic levels in the most recent quarter.
This trend indicates a potential decline in US consumers' spending capacity which has been a significant factor in maintaining rapid economic growth this year and avoiding a widely anticipated recession. Some financial analysts caution that an economic downturn might still be on the horizon as households' spare cash dwindles.
The Federal Reserve Bank of San Francisco predicts that the overall surplus savings will likely be exhausted in this current quarter. Despite this, household net worth saw an increase of approximately $5.5 trillion in Q2 2021, reaching record highs. This surge was primarily driven by housing wealth and stock gains, assets more commonly held by wealthier households.
The Federal Reserve's data also underscores an unusual pattern in household finances following the economic downturn caused by Covid-19 compared to previous recessions. Government financial aid and enforced savings during lockdowns enabled Americans to accumulate additional cash reserves. This extra capital boosted a swift economic recovery which may now be slowing down due to depleting funds.
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