Once again, Americans are saving less and spending more. It seems that last year’s increase in saving was more a brief flirtation with thrift and self-denial prompted by momentary circumstances than a fundamental shift in consumer behavior. While Americans aren’t returning to the go-go times that preceded the Great Recession, the savings rate is slipping again and consumers are ready to fuel the economic recovery with the contents of their wallets. I expect the saving rate to remain around 3% for the next year or so.
On Oct. 9, 2008, arguably the pinnacle of the financial crisis that sent our economy into the abyss, BusinessWeek magazine featured a cover story titled “The New Frugality.” Calling it the “dawning Age of Frugality,” the article quoted a University of Wisconsin economist who asserted that “consumers won't be in a position to spend freely for five years.” BusinessWeek wasn’t alone in that view. Barbara Dafoe Whitehead of the Institute for American Values opined “a turn to savings and wiser spending may persist for a long time,” citing, among other factors, “generational imprinting.”
"Like the young who came of age during the Great Depression," she continues, "today’s young people may be deeply imprinted by the experience of the economic collapse. This formative memory is likely to foster more careful spending and saving in years to come -- as it did for the Depression generation."
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For a time, the sober assessment seemed to fit. In 2008 and 2009, consumer spending collapsed and the saving rate climbed. After hitting an all-time low of 1.4% in 2005, the rate averaged 4.2% last year and even briefly exceeded 6% during the month of May. But instead of some fundamental and lasting change in consumer psychology, the heightened thrift is better explained by cyclical forces that are already in retreat.
By far the most important have been huge swings in household wealth. After all, it isn’t saving per se that matters most to people, it’s their total net worth. Whether that comes from saving or the appreciation of assets already owned is of little significance. And during the two-year period from the spring of 2007 to the summer of 2009, the combined effect of falling stock and house prices evaporated an astounding $17.4 trillion -- or 26% -- of household wealth.
In fact, movements in the saving rate closely track those shifting fortunes. The all-time high in household net worth occurred in the second quarter of 2007 and was followed nine months later by a record low saving rate of 1.2% in the first quarter of 2008. Three months after household wealth ended its swan dive, hitting bottom in the first quarter of 2009, the saving rate hit a 12-year high of 5.4%.
More recently, however, these same forces are still at play, though now in reverse. As the free fall in house prices gave way to stabilization over the past year and equity prices skyrocketed, household wealth recouped about one-third of its previous loss. And as it did, the saving rate eased from 5.4% to 3.1% last quarter. Increasingly, it seems clear that the new age of frugality was merely a passing fad.
None of this, mind you, is to say that households shouldn’t be saving more. So long as our government maintains large and chronic fiscal deficits, any shortfall in domestic private saving necessarily requires more borrowing from abroad -- and that’s an unsustainable proposition. Ultimately, there’s a huge risk that foreigners will lose confidence in our ability to repay those debts, forcing Americans to do more of their own saving. But that’s more of a long-run problem that doesn’t seem especially impending at the moment. In the meantime, there’s shopping to be done.
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