A key US consumer indicator has dipped to 'crisis levels,' SocGen says

• The US personal savings rate has dropped, Société Générale notes.
• Households are saving less than 3% of their disposable personal income, Commerce Department data shows.

US consumers are flashing a key signal that has typically preceded a recession — and investors have reason to be on high alert for more signs of weakness, according to Société Générale.

The bank pointed to the decline in the personal savings rate in the US, with households saving less than 3% of their disposable personal income in August, according to data from the Commerce Department.

The savings rate slumped below 3% prior to the 2008 financial crisis, SocGen strategist Albert Edwards said in a note to clients on Wednesday.

"I must apologize for falling asleep on the job. I hadn't spotted that the US personal saving ratio (SR) had laid all the way back to what I would describe as crisis levels," Edwards wrote. "July's decline below 3% should be sounding a very loud warning klaxon in the ears of investors to not forget what happened in 2008 when the SR fell this low."

The low savings rate attests to strong consumer spending, which has propped up the economy so far.

That sounds like it should be good news, but the issue is that the savings rate is likely to rise again after plummeting to such low levels. Forecasters have argued the economy could experience a slowdown once consumers pull back on their spending and begin to build their savings again.

That was what happened leading up to the Great Financial Crisis, when an uptick in the savings rate preceded the recession, Edwards noted.

And while households aren't nearly as indebted as they were during the financial crisis, Americans are still showing signs of financial strain. Two-thirds of middle-income households said they believed their income was falling behind the cost of living, according to a second-quarter survey conducted by Primerica.

Households, meanwhile, likely depleted their excess savings from the pandemic as of March of this year, San Francisco Fed economists estimated.

76% of US consumers add that they expect to "trade down" over the third quarter, which includes actions like delaying purchases, searching for discounts, or opting for a buy now, pay later plan at checkout, according to a McKinsey & Company study.

72% of middle-income households also said they they were cutting back on non-essential spending, Primerica's survey found.

"Nevertheless, any rise in the SR will slow GDP growth sharply," Edwards said. "For history suggests when the SR sinks this low, it usually proves unsustainable with a subsequent rise triggering a recession," he later added.

Markets still have their eye on the lingering risk of recession, despite most of Wall Street feeling optimistic about a soft landing. The US has a 62% chance of tipping into a downturn by August of next year, according to a projection from the New York Fed, slightly higher than recession odds calculated last month.