American households and businesses are seeing their savings deteriorate as ‘financial fragility’ rises

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After locking out savings during the post-COVID-19 crisis, American families and businesses are seeing their financial cushions rapidly deteriorating as prices soar and the Federal Reserve significantly increases the cost of borrowing money.

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This is taken from the latest reading of S&P Global Ratings’ financial fragility indicator, which rose sharply during the second quarter of this year, the fastest pace of decline since the great financial crisis in 2008 and the dot-com crash back in 2001. Gone.

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

“What I find worrying is how quickly they spent through their savings,” Bovino said of American households and businesses during a phone conversation with MarketWatch.

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“It doesn’t bode well for 2023, as cumulative rate hikes pick up.”

The FFI is based partly on data on the financial accounts of US consumers and businesses collected and published by the Federal Reserve. The higher the reading on the FFI, the less of a capital buffer available to help weather unexpected spending.

S&P Global

Thanks to the lockdown imposed during COVID-19 as well as the incentives given by the government to consumers and businesses in the wake of the crisis, consumers and businesses saw an increase in their savings buffers.

But now the trend is rapidly reversing, as capital buffers have almost wiped out all post-pandemic growth.

During the first half of 2022, those savings were being wiped out fairly quickly, thanks in part to the effects of inflation, which reached its highest level in more than 40 years over the summer.

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

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

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

Perhaps the only thing that could avert the crisis would be a pivot in Federal Reserve policy. However, Federal Reserve Chairman Jerome Powell has said he will keep interest rates high until inflation is over.

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

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