US households and businesses see savings deteriorate as ‘financial fragility’ rises

By Joseph Adinolfi

After saving in the aftermath of the COVID-19 crisis, American households and businesses are seeing their financial cushions quickly deteriorate as prices have soared and the Federal Reserve has dramatically increased the cost of borrowing.

That’s according to the latest reading of S&P Global Ratings’ Financial Frailty Indicator, which rose rapidly in the second quarter of this year, marking the fastest rate of deterioration since the Great Financial Crisis. of 2008 and the dot-com crash of 2001.

While the indicator has returned to its long-term average of zero, the pace of the move is far more alarming than the absolute level of the index, said Beth Ann Bovino, chief U.S. economist at S&P Global Ratings. and author of the report.

“What I find alarming is how quickly they’ve depleted their savings,” Bovino said of U.S. households and businesses in a phone conversation with MarketWatch.

“That doesn’t bode well for 2023 as the cumulative rate hikes take hold.”

The FFI is based in part on U.S. consumer and business financial account data collected and published by the Federal Reserve. The higher the FFI reading, the less capital reserve there is available to help meet an unexpected expense.

Thanks to the containment measures imposed during COVID-19, as well as the stimulus funds distributed by the government to consumers and businesses following the crisis, consumers and businesses have seen their savings reserves increase.

But now that trend is rapidly reversing, as capital reserves have nearly erased all of the post-pandemic upside.

During the first half of 2022, these savings unfolded quite quickly, thanks in part to the impact of inflation, which reached its highest level in more than 40 years during the summer.

It is entirely possible that the indicator could reach levels associated with severe economic stress as early as next year, Bovino said.

American consumers and businesses are still waiting to see the full impact of the Federal Reserve’s massive interest rate hikes ripple through the broader economy.

But as borrowing costs continue to rise and prices remain stubbornly high, Bovino expects these signs of stress to worsen by 2023.

Perhaps the only thing that could avert a crisis would be a pivot of Federal Reserve policy. Although Federal Reserve Chairman Jerome Powell has said he will keep interest rates high until inflation finally subsides.

“We believe this negative loop of tighter financial conditions can only ultimately be broken by the Federal Reserve,” a team of global markets analysts at MFUG Bank said in a note to clients.

-Joseph Adinolfi

 

(END) Dow Jones Newswire

10-08-22 1018ET

Copyright (c) 2022 Dow Jones & Company, Inc.

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