Consumers: Saving Trumps Spending

Consumers continue to increase their savings. Here's the recent behavior. (Note that the first spike, in mid-2008, came from the stimulus checks.)

Is the recent run-up of savings the new trend? Let's look at more history.

The latest changes looks too "spiky" to be a trend. However, I expect that savings will rise on a sustained basis to about eight percent, at a pace comparable to the decline in the 1990s, of maybe half a percentage point per year.

Why isn't this the beginning of further growth in the savings rate? I think there will be a bit of a spending relapse because of the accumulation of money in consumers' pockets.

The decline in spending is NOT due to falling income, but rather due to fear--plus a desire to bump up savings. Given the wild swing in consumer attitudes, I expect spending to increase in the coming months, but not to the exuberant pace of 2005. Call it a moderate rebound, one consistent with a gradual increase in the savings rate.

This sets the stage for economic recovery. Heck, if consumers simply stopped tightening their belts, and held spending level, that would set the stage for recovery.

Comments

[Chris of NH:]

Consumers are really pi*sing off the tax and spend DC crowd,,, I would not be surprised if we see treason charges levied against people who do not hold up their end of the bargain and spend every dime they have.

I am only half kidding....

Jun 03 09:45 AM

[Chandragupta:]

Savings is what America and American consumers need. Spending can set the stage for economic recovery, but ONLY if it comes from past Savings, not if it comes from borrowings. This is true not only at an individual level, but also at an aggregate level, for the country as a whole. If the basic rule "Income > Expenses" is violated, one cannot get a sustainable model, whether for an individual, company or a country.

Jun 03 09:53 AM

[jeandit75:]

I like your conclusion Doc. "if only". The economy is not gonna recover with "IFs" and imaginary "green shoots". Sorry.
A more appropriate conclusion would be: " since the consumer is tightening his belt, and we all know the economy is 70% driven by the consumer, then it is reasonable to think there won't be any significant recovery for a VERY LONG period of time. The time will be dependent on the deleveraging need."

Jun 03 10:59 AM

[Chandragupta:]

Savings is what America and American consumers need. Spending can set the stage for economic recovery, but ONLY if it comes from past Savings, not if it comes from borrowings. This is true not only at an individual level, but also at an aggregate level, for the country as a whole. If the basic rule "Income > Expenses" is violated, one cannot get a sustainable model, whether for an individual, company or a country.

Jun 03 12:48 PM

[conceptwizard:]

People cant spend what they dont have. Home equity evaporation, Portfolio equity losses, foreclosures and unemployment still dropping will cancel out any spending spree forecasts. You cant have a recovery without spending the GDP is 70% based on consumer spending.

Jun 03 01:00 PM

[WS1835:]

I love your second graph. It gives a good illustration of our current predicament. That chart clearly shows our 25 yr spending spree. You can only spend down for so long. Then you have to cut back and pay the piper. Ain't no free lunch. American households are now starting to throttle back on spending and instead pay-off the debt piled by living beyond their mean in the last two decades. We should be celebrating this fact. Remember the word leverage? It has to unwind sometime and that time appears to be now, at least for personal spending.

I only wish the government was exhibiting such good common sense. Spending will have to be cut back drastically in the near future if we wish to avoid insolvency. You are seeing a technicolor preview of the event in California right now. It will not be pretty, and it will get worse the longer we put it off.

Jun 03 11:01 PM