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Cash-Strapped Consumers Face Reality as Pandemic Stimulus Payments End

American households are now left to fend for themselves as pandemic-related stimulus funds have been fully depleted.

Over the past three years, consumers have been utilizing these excess savings to cope with inflation and other financial pressures. However, these savings officially ran out earlier this year, according to Jeffrey Roach, chief economist for LPL Financial, in a recent report. The stimulus funds were distributed in three major rounds from early 2020 to early 2021.

With the relief funds exhausted, many people are finding it increasingly difficult to pay bills, bank deposits are declining, credit card balances have surged above $1 trillion, and other financial challenges are worsening. Nevertheless, the depletion of stimulus funds may not significantly hinder the economy, and financially strained consumers still have options to improve their situations.

Roach noted in his commentary that excess savings peaked at $2.1 trillion in August 2021, based on data from the Federal Reserve System, the Bureau of Economic Analysis, and other sources.

Early in the pandemic, spending limitations on activities like travel helped boost savings. However, since the peak three years ago, Americans have been steadily drawing down these savings, often splurging on goods and services to make up for lost time.

Could Depleted Stimulus Funds Stall the Economy?

Consumer spending accounts for about 70% of economic activity.

The question now is whether the depletion of surplus savings will slow spending enough to undermine the economy. Many economists, including Roach, are not forecasting a recession anytime soon.

One favorable factor, according to Roach, is that many homeowners refinanced their mortgages years ago and are now benefiting from lower borrowing costs. “The extra money saved from lower mortgage costs will likely offset the decline in excess savings,” he predicted.

However, other economists have pointed to rising rents and mortgage payments as contributing to financial stress for many.

“Consumers are continuing to adjust to the post-pandemic world,” said George Hammond, a research professor at the University of Arizona. They are dealing with lower savings, absent the stimulus payments, yet still face high prices for many items. Hammond cited reduced housing affordability in states such as Arizona, along with increased food and gasoline prices, as headwinds.

Credit Card Debts Surpass $1 Trillion

Many households had already exhausted their stimulus payments last year, if not earlier, according to Amy Robbins, an associate director at Take Charge America, a Phoenix-based nonprofit that provides debt and credit counseling.

For many people, the loss of stimulus funds and declining personal savings were worsened by job losses.

“So, we guided clients on developing a new budget, reducing expenses, selling assets, or enrolling in a debt-management plan to bridge the gap,” she said in an email.

While jobs have generally been plentiful, many consumers have struggled to make ends meet amid low wage growth that hasn’t kept up with rising costs. Additionally, some individuals face student loan payments, while others are having trouble affording housing, either from escalating rents or high-interest mortgages.

It’s no wonder that some households have turned to credit cards for financial support.

Aggregate card balances have been running at or near record highs, above $1.1 trillion, for the past few quarters, up around $250 billion compared to a couple of years earlier. Robbins suggested that people struggling with high card debts seek a free counseling session from a nonprofit agency.

“In many cases, consumers can pay off the debt on their own, but they need direction on how to do that with a new budget and lifestyle changes,” she said.

Will the End of Pandemic Stimulus Funds Hurt the Economy?

Like Roach, Hammond is not overly concerned by the depletion of those savings, though he does expect muted personal-income growth to contribute to slower retail spending this year.

Bank Balances Dwindling

The economic landscape has been mixed for households. While consumer financial health has gradually improved over the past six months, the changes are modest, and nearly half of Americans fall into the “vulnerable” category, stressed by high prices, according to a recent J.D. Power survey of bank customers.

The study found that bank balances have been declining, with 53% of respondents saying they have less than $4,000 in combined checking, savings, and other deposits at their primary bank.

In part, this reflects some customers shifting money among banks in search of higher yields, lower loan rates, better rewards, or other benefits, said Jennifer White, a senior director of banking and payments intelligence at J.D. Power. But it mostly reflects consumers struggling to keep up with rising costs. “They’re having to use deposits to bridge that gap,” she said.

The J.D. Power study estimated that 40% of bank customers earn less than 1% on their money, while 23% don’t know what rate they are earning. The report predicts that bank customers will become more active in seeking out higher yields to gain any edge they can.

White suggests that consumers build an emergency savings fund with an account that yields at least 3%. She also recommends seeking additional help from banks, such as online budgeting tools that can track spending.

“These tools are built for everyone, not just the wealthy,” she said.

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