Consumers Saving Instead of Spending
For the first time in recent memory, the savings rate among Americans is actually going up. When the government releases monthly numbers on consumer spending, they also calculate the percentage of after-tax income that is saved by consumers. This number is called the savings rate, and over the past several years we have seen a savings rate in the U.S. of almost zero. This increase is a positive sign in some ways, but corporations navigating this recession would prefer to see people spending more money again.
During the month of December, Americans saved 3.6% of their after-tax income. The last time we saw a savings rate this high was in May of 2008, when Uncle Sam was sending rebate checks to taxpayers in an effort to stimulate the economy. The Savings rate for 2008 overall was 1.7%–a number that doesn’t sound like a lot but is much higher than other recent years. In 2005, for example, the savings rate was 0.4% for the year and at times during the year was negative. People felt prosperous, home values were increasing, and money was being spent instead of being saved.
The only other time we have seen a negative savings rate in the U.S. is during the great depression. Then it was out of need that people failed to save money, but in 2005 it seemed to be more out of greed that consumers abandoned the idea of saving for harder financial times. Home prices were going through the roof and economists began pointing to the “wealth effect” to explain why people were so comfortable spending more than they were earning.
The U.S. has not been known in recent history as a nation of savers. So why are we saving now? The main answer is that people are worried. Jobs that seemed secure a few months ago are now in jeopardy as companies from just about every industry are announcing layoffs. People are sacrificing purchases today in order to save a little more in case things get worse before they get better.
While the savings rate is good news for consumers, who are finally being more responsible, companies will need consumer spending to increase in order to survive for as long as this recession might last and beyond.
In a perfect world, wages will increase so that people can continue to save some of their income but still spend enough to keep the economy growing. We are, of course, in a very imperfect financial world today. Consumers are unlikely to increase spending again until they have some reason to feel more confident about the economy and their job security. Until then, look for the savings rate to continue to increase.
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Tags: consumer spending, economy, great depression, savings rate
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