Welcome back to another Spending Watch – our consumer-centered article series – where we keep you updated on the state of the consumer and what to expect next. 

Today we zoom in on one of the core drivers of consumer spending and robustness in the post-pandemic period: excess savings. There have been various ways of measuring this metric, and a huge thanks to San Francisco Fed who have developed a (in our opinion) reliable method for determining excess savings in the economy. 

Main conclusions up front: 

• Fiscal stimulus and money supply is the main driver of the increase in consumer spending and excess savings
• Excess savings remain solid, but the outlook is looking darker based on the approach you take in estimating future savings
• Decreasing profit margins and increasing real wages might lead to better consumer conditions, but also an inflation wave vol. 2

The fundamental cause of most economic phenomena seen after the pandemic has been the rapid increase in the money supply, and despite Jpow bringing the vacuum out to suck up all the helicopter money issued from the white house, inflation has yet to completely capitulate. And depending on what method you use to examine the future of excess savings, the inflation outlook changes quite materially.

Chart 1: The M2 deviation is the main driver of this economic cycle