A familiar economic trend in America: Spending up, saving down

December 27, 2013

The U.S. economy has grown faster than expected in recent months, and energized American shoppers are the reason why. In September, October and November, consumer spending increased faster than it has in any three-month period since the Great Recession ended.

That surge comes with an all-too-familiar side note: In order to spend more, Americans are saving less.

Workers’ incomes still aren’t rising very fast — and they’re not rising enough to keep up with the increase in spending. Consumers suddenly don’t seem to care very much about that, perhaps because they feel buoyed by a finally healing housing market, a falling unemployment rate and new optimism that the economy is shaking off its slow-growth shackles.

The nation’s savings rate fell to just above 4 percent in November, the Commerce Department reported this week. That’s closer to the low savings rates the country experienced in the mid-2000s, in the run-up to the financial crisis, than it is to the savings rates for the first few years after the recession ended.

There are reasons to worry about that trend, and there are reasons to think it’s good for the economy — or not a concern, at least.

There’s also reason to think the trend tells us something about how much of a mark the recession left on Americans’ savings habits.

“People who went through the Great Depression saved a lot,” said Daniel Altman, who teaches economics at New York University’s Stern School of Business. Maybe, he said, the dip in the savings rate shows that “people who went through the Great Recession, it won’t stay with them, and they’ll go back to where they were six or seven years ago.”

America’s savings rate fell steadily from the early 1980s through the mid-2000s, ticking up only during or after recessions. It topped 11 percent during President Reagan's first term. From 2005-07, the annual rate averaged 3 percent (a number that may appear higher than you recall because of a recent change in how the government calculates the rate). In retrospect, that rate was a sign that consumers were borrowing and spending too much, in part because the housing bubble gave many people an inflated sense of their personal wealth.

The savings rate essentially doubled during the recession, and it stayed there, averaging nearly 6 percent from 2009-12. The initial increase wasn’t due to Americans plugging more money into retirement or savings accounts, economists at the Federal Reserve Bank of New York found in a 2011 study. It was due to people paying down debt, especially mortgages.

That process, known as deleveraging, was widely blamed by economists for dampening economic growth after the recession.

An optimistic way to view the recent decline in savings, then, is as a sign that the dampening is over. Home values are rising again, and quite rapidly in many areas. So are stock prices. Consumers appear to be feeling again what economists call a “wealth effect” — as they perceive their homes or portfolios are worth more, they’re more likely to spend more at present. That spending could spur more economic growth, more job creation and faster income growth — a virtuous cycle.

A more pessimistic view would be: “Here we go again.” The plummeting savings of the 2000s did not lead to durable income gains for a broad swath of American workers. There’s no guarantee big income gains are around the corner now, either, and no guarantee that consumers are spending because they see raises in their future.

(They could also just be burning off pent-up demand. For example, automobile purchases are a big chunk of the recent spending increases, at a time when Americans are driving older cars than ever before.)

If you’re concerned about consumers getting in over their heads again, there are better ways of measuring that than the savings rate — and so far, they’re encouraging. One of those measures is to compare household debt payments to disposable income. That ratio has fallen from 13 percent pre-recession to about 10 percent now, notes Louis D. Johnston, an associate economics professor at the College of St. Benedict in Minnesota.

Johnston said he won’t start to worry unless it climbs back into the 11.5-12 percent range.

Jim Tankersley is the editor of Storyline, where he explains complex public policies and illuminates their human impact.
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