Has Pandemic Era Savings Dried Up?

The Covid-19 pandemic created an unusual macroeconomic environment, where households worked extensively and reduced expenditures. This caused a surge in savings that affected consumption and capital markets for years thereafter. Excess savings and delayed consumption created pent-up demand for goods and services that contributed to the post-pandemic surge in inflation. The pandemic-era asset accumulation also contributed to the surge in financial asset prices in the years following the pandemic. Determining how much—if any—excess savings remains provides insights into the outlook for both consumer and capital markets.

One of the challenges in measuring remaining excess savings is the lack of a clear baseline or counterfactual. Abdelrahman and Oliveira (2024), for example, measure excess savings by summing total flows to savings and comparing it to its pre-pandemic trend. Although this approach provides a reasonable and informative measure, it fails to account for the underlying macroeconomic dynamics. For example, pandemic-related savings in equity markets would have experienced a surge in valuation that would undermine efforts to measure the stock of savings by summing over the savings flows over that period. As a result, although the added flow to savings during the pandemic is clearly visible, the stock of savings cannot fully be inferred from that series.

An alternate framework for measuring remaining excess savings starts with the end in mind—why do we care about excess savings? Businesses may care about households’ ability to sustain consumption at current levels. Investors also may care capital flows into equity markets from pandemic-related cash or money market savings. Two estimates of household savings could provide a useful reference to measure these values and provide a broader macroeconomic outlook: households’ total net worth and total liquid assets.

While total net worth may be the best measure of households’ stock of resources, it reflects a broad range of financial and nonfinancial assets. Because this spans illiquid assets, like houses, it understates the ability of households to quickly convert it to consumption. Nevertheless, households can convert illiquid assets to consumption, however costly the conversion may be, and it may also reflect pandemic-related asset accumulation. The series shows a clear jump during the pandemic before settling back down to its pre-pandemic trend. Whether this stabilization of household net worth indicates an end to pandemic-era asset market activity requires a deeper look into the composition of household assets.

Whereas household net worth normalized in the post-pandemic years, liquid assets—i.e., checkable deposits, money market funds, and cash balances—remain at multiples of pre-pandemic levels. The start of the pandemic caused a surge in cash holdings while interest rates were near zero. Then, higher interest rates as the Fed began combating inflation encouraged households to sustain heightened cash reserves. This has two implications. First, since cash balances are the most liquid assets, households on an aggregate level can sustain consumption over moderate time horizons. Second, as interest rates begin declining, households may be inclined to shift resources towards assets generating higher returns. If cash balances return to pre-pandemic levels, this could reallocate as much as $4-5 trillion into equity and other higher-yielding investments.

While flows to household savings may have declined to or below pre-pandemic levels, the stock of household balance sheets elevated. Moreover, households still maintain large liquid reserves that could either moderate consumption or flow to other asset markets as the Fed begins lowering interest rates. Either of these two cases indicate near-term stability in consumption and capital markets.