While The Fed’s unenviable task of orchestrating a “soft landing” for the economy is increasingly precarious, the average American has something to land on in the event things come down hard: a cash cushion.
After the pandemic allowed for near-unprecedented levels of personal savings, many Americans now have a massive, and unusual, advantage in the face of recession.
Saved by the Cash Swell
Between government assistance, upgrading to higher-paying jobs, and just plain having fewer outings to splurge on, the pre-vaccine era of the Covid pandemic gave Americans across tax brackets the gift of increasingly bloated savings accounts. Even in the face of rising inflation, recent data from the Federal Reserve shows Americans have mostly held tight to it.
The unprecedented phenomenon could dull the worst effects of, or even prevent, an economic downturn:
- While Americans in the top 10% of wealth saw cash and cash equivalents on-hand increase 32% from the end of Q1 2020 to the end of Q1 2022, people in the bottom 50% of wealth saw savings increase 45%, according to Fed data.
- Overall, US households held $17.9 trillion in cash and cash equivalents at the end of Q1 2022, a slight increase from Q4 2021 and a massive increase over the $13.7 trillion held at the end of Q1 2020, just as the pandemic was picking up steam.
While the average saving rate — the portion of paychecks that don’t get spent — has dipped slightly recently, down to 4.4% in April from a pre-pandemic average of 7.6%, Barclays economists tell The Wall Street Journal the downturn likely won’t catch up to American households until at least the end of next year. Should a recession hit, savings accounts, it seems, may just save the day.