How Will the U.S. Savings Rate Grow?

Americans are starting to save again rather than relying on capital gains to do their saving for them. The government says Americans set aside $260 billion from their disposable incomes in October, up from about $70 billion a year earlier. That's a step in the right direction for the long term, even though it intensifies the short-term downward pressure on the economy because consumers aren't spending.

The effort to save more amid weak income growth and tight credit will prevent consumers from providing their usual oomph to the recovery. As a result, businesses will not be as quick to expand.

The fall in oil and commodity prices saw disposable income improve and has pushed the savings rate to 2.8% which is an improvement from the 2005-07 figures of less than 1%. The refinancing of the mortgages at lower rates may also help in this process and can also be used to retire credit card debts.

Source: Business Week

This may appear as a negative factor from a consumer spending point of view as in many of the past downturns they have provided the push for recovery as they could borrow at low rates to lend. However in the current context given the individual leverage levels and falling income levels the psyche may not allow such a process.

Source: HSBC

The positive is that it will help soften the effect on the cost of stimulus that has to be paid at a future date. An increasing savings rate will help cushion the leverage risk that the US as a country has and is likely to see a substantial jump in the near future. Increase of this rate to the long term average of 7 to 8% will augur well for the future. How the US consumers trade off is a must watch.

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Comments

[Jan Baker:]

I wish this outlook prevailed--that savings is a good thing. But apparently it does not. Those who lower the interest rate to zero, for example. I was even surprised to see Ben Stein on CNN pleading with the American public to spend and spend NOW (the implication being, even on credit) and almost in tears. And of course, overwhelmingly on the 'other side' of the Feed-the-Pig cheering section, the present plan to bail out the economy with borrowed money. Because all that proposed money is borrowed, isn't it?

In my humble opinion, the only business that needs to be bailed out is the American womb. Do everything possible and necessary to get women to have their babies, and in each year that passes, demand will re-establish itself naturally.

Jan 08 11:28 AM

[axelrod608:]

How Will the U.S. Savings Rate Grow? Temporarily. Once people realize that their interest is less than taxes and inflation, they will stop saving.

The ZIRP ( zero interest rate policy) is counterproductive. Pay to save ? Not likely to gain popularity any time soon.

Jan 08 12:19 PM

[momomiester:]

So how is this good without earnings growing just as fast? If people are saving more they are spending less. That means less demand for products and that means less jobs. Which leads to less earnings and savings. Think about it.

Jan 08 12:45 PM