The pandemic savings cushions that helped Americans weather high prices in recent years have worn through, contributing to a loss of consumer firepower that’s rippling through the economy.

Delinquencies are rising. Executives are flagging caution among shoppers in recent earnings calls, and retail sales barely increased in May after falling the month prior. Economists are forecasting solid inflation-adjusted consumer spending in data that’s due out Friday, helped by lower gasoline prices, but that would follow an outright decline in April.

The resilience of American consumers – and their willingness to spend despite rising prices and high borrowing costs – has been a pillar of the unwavering strength of the U.S. economy in recent years. A healthy labor market has played a key role, but so has the roughly $2 trillion in excess savings Americans accumulated during the COVID-19 pandemic.

Those excess savings have been fully depleted as of March, according to the Federal Reserve Bank of San Francisco, heightening concerns about the durability of consumer spending.

“That excess cushion that households were able to fall back on in the immediate aftermath of the pandemic is no longer available for the most part,” said Stephen Stanley, chief U.S. economist at Santander. “And so their fortunes are basically tied to their current income, which is inevitably a function of the labor market.”

Employers added 272,000 jobs in May, surpassing all economists’ forecasts, and layoffs are low. But the pace of hiring has cooled, and the unemployment rate has begun to edge higher.

For now, that resilient labor market is keeping consumers afloat and giving the Fed the space to keep interest rates high to tame inflation, and economists say household balance sheets overall are healthy. But policymakers, including Fed Governor Lisa Cook earlier this week, acknowledge the growing financial strain in some pockets of the economy.

“The pullback in consumption is all a part of the Fed’s plan,” said Dana Peterson, chief economist at the Conference Board. “But it’s difficult to calibrate that, and there are concerns that maybe consumer spending shrinks by too much.”

U.S. household debt has reached a record, and more Americans are falling behind on their credit card payments, according to data from the New York Fed. A third of households in a recent Census Bureau survey reported that it was somewhat or very difficult to pay for usual household expenses in the week prior, and the savings rate has fallen.

Some retailers are also warning about changes in consumer behavior. Target chief growth officer Christina Hennington said consumer debt levels are among the reasons the company has a cautious near-term growth outlook. Meanwhile, the chief financial officer at Walmart, John David Rainey, said shoppers are spending more of their paychecks on necessities and less on general merchandise.

Joseph Lewis, of Brockton, Massachusetts, banked about $15,000 in new savings by late 2021 due to the pandemic’s effects. Not only was he able to save on gas and parking, but he also benefited from the government’s pause on student loan payments.

That money helped to pay for repairs on the home that Lewis, 33, bought with his girlfriend in 2022, and to finance growing everyday expenses like groceries. But now, with those savings largely spent, he finds himself pulling back where he can and looking for ways to save money – including trailing behind his 6-year-old twins at home, reminding them to turn off the lights behind them.

“We’re in a space where we have to be financially creative in terms of really figuring out what it is you can do without and even what it is that you can perhaps do on your own,” said Lewis, who works as the associate director of an academic program for high schoolers.

It doesn’t help that borrowing money isn’t likely to get cheaper anytime soon. Fed officials have signaled they plan to keep interest rates at current levels, a more than two-decade high, until they gain more confidence that inflation is continuing to cool.

“Consumers might be continuing to spend, but it’s taking a toll,” said Tim Quinlan, a senior economist at Wells Fargo. Americans’ nonmortgage interest payments – such as for credit cards and auto loans – as a share of their disposable income was 2.4% in April, near the highest levels since 2008, according to Quinlan’s analysis of Commerce Department data.

“The cost of carrying that debt is taking a bite out of people’s incomes in a way that it has not since the financial crisis,” Quinlan said. He expects consumer spending growth to slow in the second half of 2024.

Still, as the San Francisco Fed researchers acknowledge in their research, estimates of how much pandemic-era savings remain in Americans’ pockets – and the potential impact on spending – carry uncertainty because economists use varying methods of calculation.

In fact, some Americans have seen their wealth grow substantially thanks to a surge in home values in recent years and record-high stock prices. Continued spending by these individuals could bolster consumer outlays in the aggregate, even if others are forced to dial back spending.

“We just about doubled our retirement from before the pandemic,” said Geoff Olson, a 64-year-old robotics engineer who lives in California’s Bay Area. “That was a combination of us putting in more money, and we just did really well in the stock market.”

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