U.S. households built up a cash cushion of about $2.1 trillion during the COVID War, when the national savings rate soared as high as 30 percent of income as many Americans stashed their federal stimulus payments into their savings accounts.

The savings rate peaked in August 2021, according to the federal Bureau of Economic Analysis (BEA), and has now reversed.

Americans have spent about $360 billion, or almost a third, of the cushion to maintain their spending habits as inflation drives prices ever higher, according to the bureau’s August data.

The shrinking cash stash indicates “the risk of recession is higher than we previously thought,” Ian Shepherdson, chief economist at Pantheon Macroeconomics, wrote in a 3 October note to clients.

As savings dwindle, more people are likely to cut spending, slowing the U.S. economy’s engine. 

“The risk has increased that people will not be prepared to run their savings down far enough and fast enough to keep consumption rising at a pace sufficient to offset weakness elsewhere” in the economy, Shepherdson noted.

Major retailers, including Amazon, Target, and Walmart, have responded to that concern by offering their “holiday season” deals beginning this month so shoppers can spread out their outlays over more time.

Even so, Americans’ disappearing savings probably mean a lackluster holiday selling season for retailers. 

Retail sales will expand by only 4 to 6 percent between 1 November 2022 and next January, business services giant Deloitte predicted in a September analysis. 

During the same period last year, retail sales ballooned 15.1 percent.

“Sustained strength in consumption will be essential to keep the economy out of recession,” Shepherdson added. “We are less confident of that” after the new data about the shrinking savings pad was released, he wrote.

TREND FORECAST: As inflation continues to erode consumers’ spending power, more and more households are being forced to slash their discretionary spending.

That is already true among households with modest incomes; increasingly, middle-income earners are having to make the same choice. Higher-income earners will continue to spend for longer.

The combination of higher prices and higher interest rates will bring the U.S. economy to a tipping point at which enough consumers halt spending to have a meaningful effect on inflation.

Inflation will begin to reverse not because the central bank raises its interest rate another half or three-quarters of a point, but when consumers stop fueling it.

However, while prices will ease, they will be much higher than before the 2020 COVID War. Therefore, the plantation workers of Slavelandia will be getting smaller pay rises and will pay more to buy less.