Americans Are Saving Like There's No Tomorrow

The Commerce Department is showing an enormous spike in personal savings as we continue with the deleveraging theme. People are not paying down their debt, sitting on cash instead. The 6.9% savings rate we hit in May is actually a 50-year average for the US - if anything, we just reverted to the mean.

Savings rate as % of disposable personal income

Some are attributing this to the government stimulus spending (see CNN: Personal income boosted by stimulus). But that's unlikely, as only about $50 billion of the $787 stimulus bill is expected to be spent this year - most of that going to various state programs. Except maybe for the increase in unemployment benefits, it's hard to attribute this to anything but uncertainty that's on the minds of the consumer.

The dollar amount of personal savings has jumped to a record:


From WSJ:

...there is still no sign that Americans are taking that money to the shops. Personal consumption expenditures, a favored gauge of inflation among Federal Reserve policymakers, were up just 0.1% on both the month and the year. The core rate, which strips out food and energy prices, was also 0.1% higher on the month.

In the long term however, this trend will help repair the severely damaged consumer balance sheet.

Comments

[Dave Wrixon:]

Rationally consumers are not paying down debts with cash because they know that it may be difficult to rollover debts in the future. If paying off debts also means the removal of a line of credit then you are going to be pretty reluctant to go that way when your cash flow is uncertain.

Jul 26 04:35 AM

[Dave Wrixon:]

"In the long term however, this trend will help repair the severely damaged consumer balance sheet."

Only if they manage to survive the storm! For those losing jobs this cash will evaporate very quickly. For the economy the critical thing is the ratio of survivors to defaulters. My guess is enough are going to be swamped to drag the whole economy much lower.

Jul 26 04:39 AM

[logicalthought:]

I don't know about you, but if I thought there were "no tomorrow", I wouldn't save a nickel!

Jul 26 08:38 AM

[The Geoffster:]

Hmm, consumers saving rather than paying off debt. Sounds like they're more willing to walk away form their debt than walk away from their homes without any pocket money. Besides, credit lines aren't being renewed and credit cards are being canceled by issuers or limits reduced.

Jul 26 11:00 AM

[CautiousInv...:]

If the current administration, after ramrodding through a disastrous stimulus package not read by most members of congress, is successful in pushing through environment and healthcare reform there will be no tomorrow as we know it.

Through inequitable policies that transfer wealth income and from those who produce to those that only consume, we are (1) misallocating resources and reducing our long term investment potential (2) destroying the fabric that holds together the middle class which, traditionally, is expected to hold together the fabric of the larger society.

By tearing asunder the middle class, we are destabilizing our increasingly fragile society. And living under political fear and gripped by both debt and continued uncertainty, savings could soar well beyond the widely dicussed range of 8% to 10% to much higher levels.

Jul 26 04:05 PM

[RJMoran:]

I only spend money on food! No restaurants, movies, extraneous driving,NO shopping of any kind, only food and basic bills... I'm sure I'm not the only one living this way!

Jul 26 04:32 PM

[Lilguy:]

The key question is how much longer Americans will save at the current rates--or higher. I hope they sustain or continue to grow their savings, because I don't think this recession is anywhere near its end. (Bottom in mid-2010; very slow recovery, say 1%/yr, for at least a couple of years).

Unfortunately, I'm less confident that Americans (on average) will continue to grow their savings. First, even if they don't have a job (& more won't over the next year or two), they have to buy essentials (OK, they could steal). Second, some will feel compelled to pay down their debt--mortgage & personal; others, in increasing numbers, will default. Finally, all the talk about "green shoots", pernicious advertising, etc., will persuade far too many that "the worst is behind us"--and they will stupidly go out and buy something non-essential.

So, I'm not expecting the savings rate to go much higher, and a year from now it could well be lower as Americans are forced to spend their savings to meet daily needs.

Ugly, but I think realistic.

Jul 27 11:08 AM

[whidbey:]

If we look at the numbers savings rate V. Consumer debt your statement, "In the long term however, this trend will help repair the severely damaged consumer balance sheet." Will don't expect much help. At the current rate of saving we are only about 50 years from eradicating 50% of the consumer debt (held at a hellish interest rate).

So, look elsewhere for some joy. I agree with the above comments, many are saving for a rainy day, like this fall, or god knows when, but soon. They know its not a pay-off world any more, It is a stiff them and lets see them do anything to a deadbeat world today. No offense to present company of course.

Jul 27 03:36 PM

[MichaelAK:]

RJMoran,

You are right with the economy my savings has dramatically increased, but I have paid off debt, except a Personal Line of Credit, keep for emergencies in saving account. I have decreased 401-k, IRA, Annuity, Variable life and kept it more flexible. Plus buying some gold and silver in case of major bank holiday. Next article should be about saving in different currencies.


On Jul 26 04:32 PM RJMoran wrote:

> I only spend money on food! No restaurants, movies, extraneous driving,NO
> shopping of any kind, only food and basic bills... I'm sure I'm
> not the only one living this way!

Jul 27 07:21 PM