Lost in all the hype over stronger consumer spending and GDP numbers is the fact that the U.S. personal savings rate, which had been on the rise, is now falling. The Commerce Department reported today that consumers saved 5.3% of their disposable income in November, down from 5.4% the previous month and down from 6.3% in June of this year. The savings rate had hit a recession high of 8.2% in May of 2009.
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Part of the reason for the steep drop in GDP in 2008 and 2009 was the fact that consumers shut their wallets and began saving again. With so much paper wealth destroyed by the housing market and stock market collapse, many people simply had no choice but to begin saving in order to rebuild their balance sheets. There were more than a few analysts and pundits who said that this next decade would be an era of frugality and savings. Many thought that the savings rate would blow through 7% and stay there for several years. But they underestimated what the Federal Reserve can entice people to do.
Part of the Fed’s goal in pushing down short-term interest rates was to goad people into stopping their new-found frugality and begin spending again. It is much tougher for people to save money when their money market and checking accounts pay them 0%. Therefore, instead of rebuilding their balance sheets, consumers appear to have taken a break and begun their spending ways again. Ben Bernanke is a Keynesian through and through and he believes that real economic growth can come from consumers overextending themselves and spending more. So far his plan seems to be working, at least in terms of the mathematics of GDP. The drop in the savings rate from 8.2% to 5.6% has added over $30 billion to the consumer spending side of the GDP accounts, which results in an extra 2.5% of GDP growth over one year.
Whether or not this can or will last is yet to be seen. It’s tough to imagine consumer spending outpacing income while unemployment is so stubbornly high. But for now consumers appear to have forgotten that they’re supposed to be rebuilding their balance sheets and retirement portfolios.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.