The US Department of Commerce is out today with monthly numbers on personal earnings, spending and saving. The good news is that spending, up 5%, rose much faster than income, up 1%. The bad news is the same: Spending grew much faster than income.
Increases in spending, especially when they are rising much faster than income, show optimism on behalf of the consumer. And in an economy in the US that is 70% driven by consumer expenditures, we need a good deal of optimism to pull us out of a recession and keep the economy chugging along. But the rise in spending and sluggish growth in income also sent the savings rate down to 3.3%, its lowest level since October 2008 (chart ht Calculated Risk). And that is bad news. Here’s why:
The problem is something called the paradox of thrift. A former Curious Capitalist Justin Fox summarized the issue nicely in a column last year.
Don’t spend more than you make. Don’t buy things you don’t need. Save for a rainy day. If Americans had followed these simple rules over the past decade, there would be no financial crisis, no worst-since-the-1930s recession, no acrimonious Washington debate over what to do about it.
Now we seem to be starting to rediscover thrift. Debt levels are falling. Consumer spending is down. The savings rate is on the rise. Great, right? Not exactly. The sudden sobering up of the American consumer happens to be the No. 1 force driving the U.S. and global economies downward. We’re saving more, yet we’re all getting poorer.
The great recession was supposed to teach all of us one lesson. Debt is bad. If we were going to pull out of this, we were all going to have to lock up our wallets and focus on paying off our bills. And indeed the savings rate did initially turn up. It is still well above its low of 1%. But the upward trajectory that many predicted has stalled. Perhaps because of what Justin said. Saving more didn’t make us feel any better.
The questions of whether this is a bump in the road or a return to 1% is up for debate. Calculated Risk still says it expects savings rates to rise to 8% during the next few years. Other economists say the idea that the savings rate would rise dramatically was probably a pipe dream.While we might cheer a drop in savings in the short-term, in the long-term, savings has no real downside. In fact, it is a catalyst for long-term grown. That’s why a generation of spend-thrifts coming out of the Great Depression led to prosperity in the 50s, 60s, 80s and 90s.
I think anyone who has lived in America for some time knows that we love to spend. So without some kind of government intervention–more incentives to save, some real financial reform that cuts back aggressive lending practices–it is unlikely that we will dramatically shift to a nation of savers. And this unfortunately is a bad thing. And that could be the best argument for some government action either in the form of more stimulus and job creation spending. Americas can only stop spending for so long. Savings seems to be a virtue again. But if incomes continue to stagnate or drop, Americas will again get used to spending more than they make. And if that happens, we can wave good-bye to another one of those Great Recession opportunities. Oh well.