February 2023 NC Economy Watch: Many Consumers Still Have Money to Spare, but For How Much Longer?

Welcome to the February 2023 edition of NC Economy Watch: an update on what’s happening in the North Carolina economy and what it means for you, brought to you by the Labor & Economic Analysis Division (LEAD) of the NC Department of Commerce. 

In this edition, we provide an update on the financial health of consumers. Rising prices are eating away at the savings households built up during the COVID-19 pandemic, but for now, many consumers still have money to spare, which has important implications for the economy in the year to come.

Many Consumers Still Have Money to Spare, but For How Much Longer?

Consumer spending is the beating heart of the American economy, accounting for nearly 70% of our gross domestic product.¹ Assessing the financial health of our nation’s consumers can help us better understand what’s happening in the economy right now and where we might be headed in the year to come.

While the COVID-19 pandemic has been a period of disruption, dislocation, and despair for millions of families across the United States, it has also brought unexpected financial security for many households. Rising wage earnings and asset values and trillions of dollars in fiscal relief from the federal government helped keep consumers afloat during the turmoil of the pandemic. Between February 2020 and August 2021, Americans accumulated $2.4 trillion more in personal savings than would have been expected based on the pre-pandemic trend [Figure 1]. 

Figure 1

Since then, price inflation has steadily eaten away at household budgets. The amount of “extra savings” built up during the pandemic has declined to $1.3 trillion as of December 2022. At this pace, these savings may be fully depleted by spring 2024.

As they draw down their savings, consumers are starting to take on more debt to make ends meet. But it’s important to keep this trend in context: despite recent increases, the nationwide rate of household indebtedness remains historically low. Data from the Federal Reserve show that, although household debt as a share of assets rose in 2022 from its pandemic-era low, indebtedness is still below its pre-pandemic rate and substantially beneath the high rates that predominated during and prior to the Great Recession of 2007-2009 [Figure 2].

Figure 2

Although we lack comparable data for North Carolina, we can report other figures that offer a general sense of how consumers in our state are faring. Over the past year, both total wage earnings and taxable retail sales have risen in North Carolina, with the increase in earnings outpacing the increase in sales [Figure 3]. While these numbers are not directly comparable to the nationwide figures reported above, they suggest that, as of mid-2022, consumers in our state continue to earn and spend.

Figure 3

It’s important to emphasize that while households overall are in a relatively healthy financial position, the same cannot be said about every household. The American economy in the 21st century has been characterized by high rates of inequality. Data from the Federal Reserve show nearly two-thirds of the wealth accumulated nationwide since the start of the pandemic has gone to the top 10% of the population, while our own research has found the distribution of wage earnings in North Carolina remains as tilted toward the highest earners as it ever has.

Overall, however, despite the persistence of inequality and the corrosive effects of price inflation, many consumers still have money to spare. This has important implications for the economy in the year to come.

Wealthier consumers are better able to endure rising costs and maintain higher levels of spending on goods and services. This spending helps keep the economy afloat, but it may also give businesses room to keep raising prices higher and higher.

As rising prices chip away at savings, more households are likely to experience financial distress, and many could be forced to reduce their discretionary spending. A downturn in consumer spending may induce an economic slowdown, or even a full-blown recession, but it could also force business to reduce prices and eventually help put an end to the rapid price inflation that has plagued our economy for the past two years.

For inquiries and requests, please contact:

Meihui Bodane, Assistant Secretary for Policy, Research and Strategy

NC Department of Commerce, Labor & Economic Analysis Division (LEAD)

mbodane@commerce.nc.gov

¹Source: US Bureau of Economic Analysis (2021)