Wells Fargo economists, spearheaded by Tim Quinlan, have made a significant departure from traditional economic analysis by reevaluating the concept of consumer savings in terms of both “excess” and household balances. This shift entails a focus on measuring combined checking and savings account totals in comparison to pre-pandemic benchmarks.
The decision stems from recent revisions to government data, which revised prior estimates of remaining “excess savings” in the economy by approximately $700 billion. The firm deems it imprudent to rely on estimates subject to such significant fluctuations.
Household cash holdings now surpass pre-pandemic levels, prompting Wells Fargo economists to prioritize this metric over estimating “excess savings.” The rationale behind this transition lies in establishing a more straightforward framework for comprehending the economic landscape, particularly in the wake of the pandemic’s aftermath.
Initially, economists sought to ascertain how much of the pandemic-era “excess savings” had been expended, with Pantheon Macroeconomics’ Ian Shepherdson emphasizing the paramount influence of the labor market on consumer behavior. This perspective has largely been validated, albeit not precisely on the projected timeline from 2022 into 2023.
The labor market’s unexpected resilience throughout much of the year contributed to sustained consumer spending. Recently, however, a softening in the labor market has emerged as a potential harbinger of an impending recession in the US economy.
Wells Fargo cautions that a labor market downturn, as predicted in their forecast, would curtail consumer spending capacity, potentially leading to a mild contraction in Personal Consumption Expenditures.
Forecasts anticipate spending to decline at an annualized rate in the first two quarters of the upcoming year, accompanied by job losses in the second and third quarters of 2024. However, the precise timing and scale of these economic shifts hold less significance than reestablishing the interdependence of employment, expenditure, and growth.
Following nearly three years of unprecedented fiscal stimulus, which upended established economic models, a semblance of order is gradually being restored to Wall Street’s macroeconomic discourse. Wells Fargo’s strategic shift reflects a broader reevaluation of economic paradigms in the post-pandemic landscape, underscoring the evolving nature of consumer savings in the current economic climate.
In redefining the assessment of consumer financial health, this shift towards evaluating aggregate household balances rather than fixating solely on excess savings marks a pivotal step towards a more nuanced and comprehensive understanding of economic stability.
Source: Yahoo Finance
