Americans Spent Less:
Why That's a Good Thing
Small decline in consumer spending can be good for the economy in the long run
Americans are earning more and spending less. The Commerce Department announced that Americans' income increased by 0.5 percent in December, but personal consumption remained flat, decreasing by less than 0.1 percent. That news is troubling on several fronts; it means people are pulling back on spending, meaning less GDP growth. In addition, it suggests that, despite indications of recent increases in consumer confidence, consumers are still hesitant to spend. But it also means people are saving money -- another necessary condition for a strong economy.
In December, Americans saved 4 percent of their disposable income, up strongly from November's 3.5 percent, and the highest that figure has been since August 2011. In a broader context, four percent is still not a high rate; savings rates hovered around 7 to 9 percent in the 50s and 60s, edging above 10 percent at times in the 70s and 80s. But in the early- and mid-2000s, the U.S. savings rate dipped below 3 and even 2 percent, an indicator of the troubles to come, as many Americans spent beyond their means.
A return to a higher savings rate, say some experts, is fundamental to restoring a healthy economy, even if it means a temporary drag on spending. It could also mean that Americans' attitudes toward debt and spending are changing.
It's easy to look at the drag on consumption as unequivocally bad for the economy, says Adolfo Laurenti, deputy chief economist at Chicago-based financial services firm Mesirow Financial, but it's also a wrongheaded view to take.
"I think that's probably not a very good way to look at economics," he says. "I say that savings are always good, because in the short term, savings has to make a better and strong economy. It means people are investing, people are paying off their debt, so I would not judge economics just by the standard of how much people are consuming."
Indeed, an excess of spending now can create a boom in growth in the short-term -- and a wealth of problems in the future. "If you think about that in the extreme of the 2000s, when we were driving the savings rate down with spending in excess of income ... it feels good at the time, but it doesn't last and tends to be associated with an accumulation of debt," says Alan Levenson, chief economist at T. Rowe Price.
According to data from the Bureau of Economic Analysis, saving levels have rebounded since the start of the recent recession, but have declined in recent quarters. In the second quarter of 2009, Americans saved 6.2 percent of their disposable income. The rate was below 4 percent for the final two quarters of 2011.
A sustained level of 5 percent or above, says Levenson, could be healthy territory for the national savings rate.
"To me as a fan of the U.S. economy, I want to see the economy recover and gain strength, but...I don't want to do that by starting another borrowing cycle," says Levenson.
For individual savers, however, there are drawbacks to saving in the current economic environment. When interest rates are lower than inflation rates, savers get a negative real return on their savings accounts, with their money in the bank losing value faster than it accrues interest.
Putting money into the bank is currently only slightly better than putting it under the mattress, in other words...but from a longer-term macroeconomic perspective, it may be a smarter move than spending it all (and then some) on that new car.
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Americans Spent Less: Why That's a Good Thing | Politics
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