After the Tape: New Frugality? Not So Fast
Note: This column, which originally ran as the Yet to be of the Tape, has been updated and abridged to include the actual figures.
A sharply higher U.S. household-savings rate was expected to be one of the lasting effects of the Fantastic Recession, agreed the collapses in real estate and the stock market. But the adjustment has so far been tamer than expected.
The personal-savings rate measures the percentage of after-tax household returns that is unspent in a agreed period. It reached 5.4% in last year’s second quarter, up from a low of 1.2% during the boom, according to the Commerce Department.
On Monday, Commerce announced that the saving rate fell to 3.3% in January, from 4.2% in December. It was the lowest rate since October 2008.
The reasons for the stall are twofold: For one, rebounding wealth since the recession?s depths has helped provide some support for consumer spending. Secondly, weak returns progression has left other consumers with small choice but to spend proportionally more of their incomes, particularly in light of still-tight credit conditions.
As a result, economists have started to rethink their first estimates of household-saving behavior. Harm Bandholz, an economist at UniCredit Research, says the stock market’s recovery and signs of stability in home prices have kept the rate from rising to the 6% level he anticipated.
John Ryding, chief economist at RDQ Economics, points out that household net value grew by $5 trillion between the first and third quarters of 2009, the latest data available, after a astute decline earlier in the recession. Additional spending generated by the rebound helped keep the savings rate from climbing to 7% or 8%, he says.
Household savings help foster long-term economic vitality, but a swift upward adjustment makes consumer-spending progression much more hard to achieve in the near term, a experience known as the “paradox of frugality.”
If the savings rate continues its holding pattern or rises gradually, it would remove one of the headwinds to consumer-spending progression in the coming months. That would be a bullish sign for the economy in the U.S., because consumer spending accounts for roughly 70% of yucky domestic product.
But with credit still tight and household net value below boom-era levels, a genuine consumer-led recovery has to be fueled by returns progression, which has barely budged in the past two years. “We need jobs,” Mr. Ryding says.