Shrinking Cash Cushions May Pinch US Consumer Spending

• Middle- and low-income U.S. families now have significantly fewer liquid resources like bank deposits than they were on track to have before the disruptions of the COVID-19 pandemic, creating financial strains that pose a risk to consumer spending, the backbone of the economy.

• Research published on Monday by the Federal Reserve Bank of San Francisco showed that for the top 20% of households by income, liquid assets - including cash and funds in savings, checking and money market accounts - rose sharply in 2020 into early 2021. They then dropped gradually and are now about 2% below what would have been expected without the pandemic shock.

• However, for the rest of American households, those liquid assets rose less sharply and the excess was depleted earlier and is now about 13% lower than the projected path prior to the pandemic. At the same time credit card delinquencies among these middle- and low-income families rose earlier, faster, and to "notably higher" rates than for high-income families, they showed.

• S. central bankers have said that continued strength in the real economy has given them room to hold the policy rate in its current 5.25%-5.50% range so as to keep up the downward pressure on inflation. However, recent economic data including a report showing a jump in the unemployment rate to a post-pandemic high of 4.3% and a slowdown in hiring in July - have fueled fears that policy may be becoming too restrictive.

• While consumer spending contributed significantly to the stronger-than-expected pace of economic growth in the second quarter, its monthly growth rate has slowed. Spending growth averaged 0.3% in the three months through June, its slowest average pace in more than a year. Last week, Chicago Fed President Austan Goolsbee said the uptick in credit card delinquencies was among the factors he was watching as a possible sign that policy may be getting tighter than warranted.

(Source: Reuters)