Depleted Stimulus Funds: Impact on American Households and the Economy

As pandemic-related stimulus funds have been exhausted, American households are facing financial challenges, with consumers drawing down their excess savings to cope with inflation and other pressures. According to Jeffrey Roach, chief economist for LPL Financial, the excess savings officially dried up earlier this year after being distributed in three main rounds from early 2020 to early 2021.

With relief funds running out, more people are struggling to pay bills, bank deposits are declining, credit card balances have surpassed $1 trillion, and other financial problems are worsening. Despite this, the depletion of stimulus funds may not significantly slow the economy, and cash-stressed consumers still have options to improve their situations.

Roach highlighted that excess savings peaked at $2.1 trillion in August 2021, based on data from the Federal Reserve System and other sources. While consumers initially faced limitations on spending during the pandemic, they have steadily spent down the excess savings over the past three years, splurging on goods and services.

The question now arises: could the depleted stimulus funds stall the economy? Consumer purchases make up about 70% of economic activity, and with surplus savings gone, there are concerns about whether spending will slow enough to undermine the economy. However, many economists, including Roach, are not predicting a recession anytime soon.

One positive factor is that many homeowners refinanced their mortgages years ago, benefiting from lower borrowing costs. This extra money saved from lower mortgage costs could offset the decline in excess savings. However, rising rents and mortgage payments are contributing to financial stress for many others.

As credit card debts have surpassed $1 trillion, households are feeling the strain. Many had already exhausted their stimulus payments last year, worsened by job losses. Amy Robbins, an associate director at Take Charge America, suggested developing a new budget, reducing expenses, selling assets, or enrolling in a debt-management plan to bridge the gap.

While jobs are plentiful, low wage growth and rising costs are making it challenging for consumers to make ends meet. Some are struggling with student loan payments, housing affordability issues, and high-interest mortgages. As a result, many households are turning to credit cards to cover expenses.

Despite the depletion of pandemic stimulus funds, economists like George Hammond are not overly concerned. While personal-income growth may slow retail spending, the economy is not expected to enter a recession. However, nearly half of Americans are considered “vulnerable” due to high prices, according to a recent survey.

Bank balances are dwindling, with many consumers using deposits to bridge the gap caused by rising costs. Jennifer White from J.D. Power suggests building an emergency savings fund with a 3% yield account and utilizing online budgeting tools to track spending. As consumers seek higher yields and better financial tools, the economic landscape remains uncertain for many households.