Savings: Good, Not Good Enough
Right after the BEA released Personal Income and Spending for August, I appeared on Marketplace Morning Report with Steve Chiotakis to discuss what the numbers mean. The report boils down to a simple fact: if you're lucky enough to have a job, you're making a little bit more (income up 0.5 percent); spending a little bit more (up 0.4 percent) and making an effort to pay down debt and save (savings rate was 5.8 percent). In other words, Americans are finally doing what they should have been doing for a long time.
But are they really? Sure it's good news that debt levels are dropping (consumer credit peaked at $2.58 trillion in July, 2008 and is down 6 percent to 2.42 trillion today), but many have been quick to point out that it's not that Americans have suddenly become more parsimonious, rather they're cutting their debt levels due to mass defaults.
Of course I'd prefer that people proactively take control of their financial lives, but to some extent, we all know what needs to happen: the great de-leveraging must continue, whether it's self or externally-imposed. Unfortunately, a near-6 percent savings rate will only get us so far towards that goal, so don't too excited about the 5.8 percent cited above. My guess is that the savings rate will have to creep up towards 8 or 9 percent in order to restore household balance sheets.
Economists will be quick to point out that saving is not good for the economy (consumers account for 70 percent of the economy, blah, blah, blah), but we've tried the other way--borrowing too much and spending--and that didn't work out too well. Rising asset prices (houses, investment accounts) aren't going to bail us out of this mess, so consumers better get busy.
Image by Flickr User alancleaver_2000, CC 2.0
