American Are Saving More...

The Savings Rate...

Personal income was up more than expected in May. The 1.4% rate of growth was more than four times the expected rate of increase. Personal spending also increased by 0.3% and that is good news because additional consumer spending will help the economy recover. Taking a closer look at these numbers, we see that income is rising faster than spending. Why? Personal saving as a percentage of disposable personal income was 6.9% in May, an increase from the 5.6% increase in April. The savings rate was the highest level in more than 15 years, going back to December 1993. Savings is increasing and that is good and bad news.

The bad news is that a higher savings rate will curtail spending and will delay the onset of the recovery. Most economists are expecting negative growth for the economy in the second quarter, but better than the recently revised negative growth rate of 5.5% we experienced in the first quarter. There is also a flip side of the coin. One reason the recovery is slow to happen is that banks do not want to lend to consumers who do not have a great financial record. For example, there are many who would like to purchase a home today but can't because of tighter qualification standards. More savings will mean that there will be more consumers who will qualify to borrow in the future. So what will hurt the economy in the short-run will actually be good for recovery in the long run. Therefore, go out and spend a little. But don't forget to save for the future.

JMO:

One big reason the savings rate is up is consumers cannot buy on credit as easily which gives them available funds for savings/investing. The big flaw I see in our economic system is we promote spending and buying on credit and then we penalize the consumer for it when things go wrong. If we required a certain amount of liquidity before consumers were allowed to purchase items on credit we could have the best of both worlds. i.e.would need 10% of vehicle purchase in available funds prior to auto financing (could still get 100% financing). 5% for homes. This would decrease the default rate as well as apply pressure to retailers to make the products more affordable. Honestly, does it make sense that a new Lexus Hybrid is the same price as a 3bd/3ba home in a very nice area of Phoenix, Arizona? Where are our priorities as consumers?