Americans have plenty of reasons to tighten their belts. That's bad news for the economy.

• Recession calls have swirled for over a year, but resilient consumers have helped buoy markets and the economy.
• But pandemic savings are running low, wage growth has slowed, and student loan payments will soon restart.

Americans' strong spending has helped stave off the recession that economists have been calling for more than a year — but with consumers facing more and more reason to tighten their belts, the likelihood of a downturn could start to tick higher.

Public opinion of the economy, as measured by the University of Michigan's consumer sentiment survey, is hovering near recession levels, and people have largely shrugged off good news like low unemployment and cooling inflation.

Upbeat economic data is no longer enough to offset how badly people feel about the strength of their wallet, as economist Darren Grant illustrated in a recent paper. As far as perception, spending power has taken precedence over all else — and that's seen a sharp deterioration since the start of the pandemic.

"My intuition and common sense says there's not a bottomless pit of savings to support this level of spending, and there's not a bottomless pit of wage growth to keep it elevated enough to drive GDP indefinitely," SoFi's head of investment strategy Liz Young wrote in a recent note. "I often wonder if the market is simply ignoring this possibility, or if I'm underestimating the strength of the consumer."

Dwindling savings

Household savings soared to an all-time high at the start of the 2020, but Federal Reserve data show that disposable income levels have fallen back to pre-pandemic levels.

In February, the personal savings rate in the US hovered just around 4.6%, well below the multi-decade average of 8.9%, according to the Bureau of Economic Analysis. Bryce Doty, senior portfolio manager with Sit Investment Associates, told Insider that his firm's calculations show pent-up savings peaked around $2.2 trillion during the pandemic, but now that's dropped closer to $700 billion.

"Once that level hits $300 billion or so spending will hit a wall," he said. "These savings have kept the economy more buoyant than people expected, but we're about to see a transformation. We've never had a time like this, with this dramatic change in people's spending. Luxury goods and travel will feel like a hard landing, but basic consumer staples won't see that. We'll see a re-prioritizing of spending."

To his point, prices for luxury watches on secondary markets have fallen near two-year lows, with Bloomberg data pointing to a slowdown in demand for top brands like Rolex and Patek Philippe.

At the same time, people are leaning on their credit cards more and more, and Fed data shows that Americans have racked up nearly $1 trillion of credit card debt.

Wages and student loans

Inflation has fallen from a blistering 9% last year to 4% in May, but even slashed by more than half, that's still eating into wage gains.

It wasn't until June that pay raises caught up to inflation after two years of lagging, with average hourly wages up 4.3% annually last month.

Still, the Bureau of Labor Statistics reported that real hourly compensation since 2020 has seen the sharpest drop-off relative to any other period dating back to at least World War II.

Morgan Stanley strategists wrote in a recent note that as consumers start to feel more financial pressure heading into the fall — which is also when student loan payments are set to resume — discretionary spending could see the steepest decline.

Roughly one-third of borrowers don't think they'll be able to meet student loan obligations once they restart in October, according to the bank. Estimates put the average payment at about $300-$400 a month. Payments are restarting right as consumers are feeling downbeat about the economy, and as strong spending has helped prop up the economy through a year of escalating recession calls.

"Only 29% of consumers who have federal student loans are confident they will have enough money to start making payments without adjusting spending in other areas," according to Morgan Stanley. The survey also found that 27% of respondents were concerned about their ability to make rent or mortgage payments, too.

The one silver lining that could cushion the impact of all this, according to Doty, is the 1.8 jobs available per person right now. The unemployment rate in May was 3.7%, up from December's 3.5%, back when the Fed had predicted unemployment would climb to 4.6% by the end of 2023.

In Doty's view, there's still plenty of demand for staffing across sectors.

"Normally as spending falls off a cliff, it's driven by a traditional recession and a lot of people get laid off and stop spending," Doty said. "But this isn't the case at all now. It's different because as people run out of money and stop spending, they can still get jobs. Ten million job openings is the safety net."