How Much Will Consumers Save?

The U.S. personal saving rate jumped to 3.6% in December (from 2.8% in November) as consumers try to offset steep losses in household wealth. The saving rate remained low into the first half of the year (dropping as low as zero in April), when gasoline prices were approaching record highs, and then jumped temporarily in the summer once government stimulus checks started hitting taxpayers’ bank accounts.

spendingHow high will it go? A lot depends on how much worse stocks, housing values and labor markets fare in the coming months. Tumbling retirement accounts and other savings in the stock market would be enough to spur Americans to put away cash. But plenty of other forces are at work. With job losses mounting, people who still have their jobs may choose to save up in case they hit trouble down the road. And home prices, now down 25% from their mid-2006 peak, have shown few signs of finding their bottom.

Dean Maki, chief U.S. economist at Barclays Capital, says the drop in saving will weigh on consumer spending over the next couple of years simply due to wealth declines that have already taken place. Because changes in the saving rate lag behind declines in wealth, the effects on savings may just be starting to take hold. (After all, stocks and home prices have been falling for well over a year.) “How long this lasts and how high the savings rate goes depends on how much these assets have to fall,” Mr. Maki says. He sees the saving rate drifting into the 4% to 5% range through 2010. But a lot depends on the performance of stocks, which presumably would recover if the government takes strong action and pulls the economy out of its downturn.

Apart from temporary spikes (such as government stimulus), the saving rate — defined as disposable income minus spending — hasn’t been as high as December’s level since 1999 — when it was coming off much higher historical levels. Saving was above 10% for much of the 1980s, then between 5% and 9% until the mid-1990s when stocks and home values started rising. One factor in the latest spike may be that consumers are delaying purchases of big-ticket items, such as cars and appliances, even though they still plan to make those purchases. But that’s only part of the problem.

Goldman Sachs economists put the long-term equilibrium for the saving rate at between 6% and 10%. Their baseline forecast assumes something closer to 10%, but they acknowledge it could be even higher. If the saving rate remains in that territory, it could be a positive for the economy in the long run. But the sudden shift, with consumer spending is already taking heavy blows, shows why the economy is tumbling these days — and why getting out of this mess will be difficult. –Sudeep Reddy


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