NY Times: Consumers Are Saving More and Spending Less

Consumers Saving More Than Thought


By CATHERINE RAMPELL
Published: August 3, 2010
Consumer Spending Stagnates in June (August 4, 2010)

Economix Blog: G.D.P. Probably Worse Than Reported (August 3, 2010) A new government report released on Tuesday showed that consumers saved 6.4 percent of their after-tax income in June, and that this savings rate had shot up as high as 8.2 percent in May 2009. Before the recession, the rate had hovered at 1 to 2 percent for many years.
The questions now are whether America’s newfound love affair with frugality will continue and whether families’ reluctance to spend will hold back economic growth.
In earlier reports, the government had estimated that families had not changed their spending patterns much in the last few years, despite the economic tumult.
As a result, many economists had worried that a big shock might be coming soon, when consumers finally faced the music and began the painful process of reducing their debt. So on the one hand, the fact that consumers really have been saving could be taken as very good news.
“The optimistic view is that this means consumers have built up a bit more of a cushion than we thought,” said Nigel Gault, chief United States economist at IHS Global Insight. “If they’re in better financial shape than thought, then maybe they could spend a little bit more freely going forward.”
That is not likely to happen anytime soon, though, he said. “It’s difficult to see consumer spending doing a lot better until we see more job growth,” Mr. Gault said.
Many other economists agree.
Ben S. Bernanke, the Federal Reserve chairman, said in a speech on Monday that Americans would start spending once they got a healthy increase in their wages or salaries. But it is not clear when that will actually happen.
Private payrolls have shown slow growth all year, and economists are forecasting that the jobs report for July, to be released on Friday, will be similarly disappointing.
“There are signs that hiring will pick up, as growth continues and as companies become more confident,” said John Ryding, chief economist at RDQ Economics. “Still, I don’t think it’s going to be an incredibly robust pickup that’s big enough to bring unemployment down sharply and put consumers’ minds at ease.”
Along with high unemployment, high debt levels continue to discourage consumer spending. American households, though borrowing less, still are paying for their free-spending ways in the credit bubble of the mid-2000s. Their debt levels are far higher than they were in the 1980s and 1990s, when they had less than a dollar of debt for every dollar in disposable income.
At the peak of the housing boom, consumers’ liabilities rose above 130 percent of their disposable income. That ratio has been falling ever since the financial crisis, and for the last year has averaged in the mid-120s, according to the Federal Reserve.
“Whatever happens with incomes, deleveraging is still the biggest constraint on spending,” said Ian Shepherdson, chief United States economist at High Frequency Economics. But he said “nobody knows where what the final stopping point for the household leverage rate is.”
Given the June spending data and reports of tumbling consumer confidence in July, many economists say a best case for consumer spending would be an annualized growth rate of 2 to 2.5 percent for the rest of this year. Spending rose at a rate of 1.6 percent in the second quarter and 1.9 percent in the first quarter.
“That’s better, but it’s still not the 4 percent growth we used to see back when the U.S. consumer was considered the engine of global growth,” said Paul Ashworth, senior United States economist at Capital Economics.
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