In September, consumers spent more but made less than expected. As a result, the national savings rate dropped to 3.6%, which is the lowest level it’s been since the beginning of the recession. And that has some nervous. The popular economics blog Calculated Risk blog had this to say:
Spending is growing faster than incomes – and the saving rate has been declining. That can’t continue for long …
In fact, the savings rate fell nearly continuously from 1985 to 2008. So savings rates can and do fall for long periods of time with no problem – until there is one. Still, coming out of the recent recession it’s natural that people would be worried about a drop in the savings rate. During the 1990s and the 2000s, many Americans spent more than they earned. They piled on debt, which they eventually couldn’t pay. That along with crazy derivatives that magnified the effects of those consumer defaults led to the financial crisis. So does a falling savings rate mean we are headed for trouble again? Probably not. Here’s why:
Rather than being a reason to worry, the falling savings rate may be another sign that the economy is improving. Consumer spending makes up 70% of the GDP. So if we want the economy to grow faster to produce jobs, then this is exactly what we want – higher spending and lower savings. Some pundits have argued that Washington has it backward. They are dealing with the debt first and cutting spending now. Instead Washington, should be spending now to get out of the slump and putting in a place a plan for debt reduction later. If that’s true, than a spend now, save later attitude of consumers is exactly what we need.
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As I said yesterday, a lower savings rate is a sign of optimism. And it could be another sign that we are not headed for a double dip recession. That’s because falling savings rates almost never lead recessions, at least not immediately. Check out this chart (h/t Calculated risk). In fact, savings rates usually spike going into a recession. Indeed, savings rates rose in late 2007 and then skyrocketed in 2008. Indeed, the savings rate had generally been rising since it bottomed in 2005. That was a bad sign. Savings rates tend to drop in good economic times. Recently, the savings rate has been jumping around, before plunging recently, which seems like a bad thing. But as a leading indicator, the falling savings rate is a good sign, not an anonymous one.
Still, it seems right to worry about savings rates. And this time could be different. American are much more in debt than they used to be. We’re much closer to the breaking point. And lower savings gives people less money in reserve to pay down their debts if the economy were to run into more trouble. We can’t possibly run up the same amount of debt that supported such a low savings rate for much of the past decade. And the fact that incomes are rising slower than expected is a problem. The 14.5 million people out of work are dragging down the wages for the rest of us. That could be even more true as the unemployed re-enter the workforce, mostly likely for lower paying jobs.
But what’s the solution for the unemployment problem? Higher spending that lifts the economy and creates jobs. Yes, there are risks that consumers spend too much and land back into their debt problems. But something is going to break us out of this non-recovery recovery. The recent rise in consumer spending could be it.