As Recession Fears Grow, Consumers Tap Savings While Banks Sock Away Cash

As fears of an impending recession grow, financial institutions are holding record amounts of cash while everyday Americans struggle to stay afloat.

The amount of cash on hand for major banks like J.P. Morgan & Chase, Bank of America, Citigroup and Goldman Sachs is on the rise, according to data from the first quarter of 2022. At the same time, personal savings rates have hit their lowest in nearly 14 years, according to the U.S. Bureau of Economic Analysis.

These trends are occurring as global economic conditions become increasingly volatile due to a variety of factors, including rising inflation, supply chain bottlenecks, rising interest rates, the lingering effects of the pandemic, and the ongoing war in Ukraine.

Inflation Groceries 10-JUN-22
A man shops at a grocery store on June 10, 2022 in New York City. The Labor Department announced on Monday that consumer prices rose 8.6% last month from a year earlier. Inflation has risen to its highest level in four decades, raising the cost of airfare, hotels, vehicles, gas, and food. Photo By Spencer Platt/Getty Images

"When you are seeing things that never happened before, you have to question your ability to predict," said Jamie Dimon, President of America's largest bank, J.P. Morgan & Chase, at the Annual Strategic Decisions Conference on June 4.

He told a packed audience that having cash on hand is the best way to protect against future inflation, and changed his previous prediction of economic "storm clouds" to "a hurricane" in a comment that went instantly viral.

But Dimon's warning of pending economic peril is consistent with those of many other experts. According to a Financial Times poll, nearly 70% of leading economists now believe the U.S. economy will tip into a recession within the next year.

As a result, major financial institutions are putting aside more cash to prepare for what they expect to be a particularly volatile period. BlackRock, the world's biggest money manager, told The Wall Street Journal that it is raising cash positions by more than 50% in many accounts.

As markets continue to decline, large financial institutions are reducing their exposure to equities and other risky investments in favor of cash. But while these moves help institutions avoid losses, consumers face more threats to their financial health.

May's Consumer Price Index report indicated a rise in core inflation, with the cost of food, energy, and housing rising nearly 10%, 20%, and 30%, respectively, since last year.

While the cash savings rate for institutions reached a decade-high level in the first quarter of this year, the savings rate for consumers fell to 4.4% in April, a low not seen since September 2008, at the start of what became known as The Great Recession, according to the most recent data from the U.S. Bureau of Economic Analysis.

Taking back much of the financial gains experienced during the pandemic, inflation is forcing more Americans to dip into their savings accounts to cover the costs of necessities like food, gas, and housing, according to a recent survey from NerdWallet.

And credit-card balances, which were slashed after Americans received government stimulus money, are ramping up again at a record 16% annual increase, according to Barron's.

Economists predict that higher prices and debt, combined with lower savings rates, will soon translate into a cutback in consumer spending — bad news for an economy in which recent growth has been driven by record-high consumer demand.

Dan Schulman, President of Paypal, expressed his concerns over these emerging trends during a recent visit to the World Economic Forum in Switzerland.

Speaking with a panel of experts, he said that the current combination of high spending and high inflation means Americans are burning through savings at a rate that could have them running out of cash by the end of this calendar year.

"We are already seeing a reduction in spending at lower income levels for sure," Schulman said, "and it's moving up to middle-income right now."

Concerns about the strength of American wallets and spending power have reached the Oval Office.

While President Joe Biden began noting rising prices as a concern late last year, In May, he officially declared the "fight against inflation" to be his top economic priority. Since his announcement, the CPI for all items has risen by nearly 1%.

Biden continues to encourage Americans to "keep the faith," conveying that message in a visit to the Port of Los Angeles on Friday, just hours after the release of new inflation numbers.

"I understand inflation is a real challenge to American families," he said, "and today's inflation report confirms what Americans already know."

But Biden insisted that the country is up to the challenge.

"America can tackle inflation from a position of strength unlike any other country in the world," he added.

Despite Biden's optimism, economic forecasts for the rest of this year remain gloomy.

Economist Narayana Kocherlakota, former president of the Federal Reserve Bank of Minneapolis and the Lionel W. McKenzie Professor of Economics at the University of Rochester, does not see economic conditions improving in the short term.

"Once you have inflation at this level, the only way you're going to be able to bring it down, through policy tools, is through incurring an unemployment cost," he said.

"Unemployment and inflation, I'm afraid, both have political costs," Kocherlakota added, "so there is no easy way out of this."