Is a Higher Savings Rate Hurting Us?

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U.S. consumers have found religion when it comes to saving money — they’re doing a much better job of it than their elected representatives in Congress. But even as a new survey shows that Americans are saving at a year-long high, the money they’re saving isn’t going into the economy — and that could prolong tough economic times.

According to the Bureau of Economic Analysis, the U.S. personal savings rate was $454.3 billion in May, compared with $427.2 billion in April. Meanwhile, personal saving as a percentage of disposable personal income was 4% in May, compared with 3.8% in April.

In addition, consumer spending is down, as well. Gallup reports that consumer spending — daily spending in stores, restaurants, gas stations and online — was down from $72 to $67 from May to June. The polling company adds that spending right now is “well below” 2008 levels. It must be a coastal phenomenon, as Gallup points out that consumer spending "is flat in the Midwest and South in June compared with May 2010, and down in the East and West." Year-over-year spending is up sharply in the Midwest — the top spending region in June — and the South, Gallup adds.

Therein lies the problem. With consumer spending down and consumer savings up, the economy is having a tough time finding a foothold. Economists point out that consumer spending comprises about two-thirds of gross domestic product. So the prudent course practiced by more and more Americans is actually hurting the economy. "Until people become more comfortable with their financial situations, they will continue to spend cautiously," Joel Naroff of Naroff Economic Advisers said in a note to investors. "The recovery is proceeding at a modest pace."

There is some good news hidden in the most recent economic numbers. When consumers do decide to spend again, they won’t have to worry about inflation. The U.S. Commerce Department reports that the core consumer price index — which economists use to measure inflation — was up a tepid 1.3% over the past 12 months. That not only means that goods and services may be cheaper as the economy strengthens, it also allows the Federal Reserve to keep interest rates lower for longer. That “cheap credit” allows businesses to borrow money at a better rate, thus giving them more financial resources for expansion and jobs.

But don’t expect Americans to go back to their free-wheeling spending ways. Mark Zandi, chief economist at Economy.com recently told NationalJournal.com that he expects the U.S. savings rate to climb even higher. “The personal saving rate will continue to drift more-or-less higher over the next decade,” he says. “Abstracting from the vagaries of the monthly saving rate data and various measurement issues, the current saving rate is probably close to 4%, up from a record low of near 1% at the start of the Great Recession. A decade from now I wouldn't be surprised if it were closer to 7%. This suggests that the adjustment in personal saving is about half complete.”

If that’s the case, then we really are in a new normal — one where Americans are reaching back in time to the years leading up to World War II when the national savings rate was closer to 10%.

That’s good news for U.S. families, who will have less debt and more cash. But it could work against the U.S. economy — at a time when it needs the Great American Consumer most.

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