Personal Savings Rate: What’s Going On – Can Spending Drive The Economy?

The personal savings rate fell to 2.6% in the 4th quarter. The all-time low rate 2.2% in 2005. What’s going on?

The Wall Street Journal says Consumers Can’t Keep Driving the Economy.

Gross domestic product grew at 2.6% annual rate in the fourth quarter, the Commerce Department said Friday. That was slower than the 3.2% it clocked in the third quarter and the 2.9% that economists expected.

A quick look under the hood shows that when it comes to demand, things are doing just fine. Personal spending grew at 3.8% rate, setting its fastest pace in three years, while capital spending growth hit 6.8%. The drags came from companies adding less to their inventories and an expansion in the trade deficit. Really, this just counts as a payback for the third quarter, when inventories and trade boosted growth.

The concern is whether demand will stay strong. Consumer spending has been regularly outpacing income growth and, as a result, people are saving less and less. The personal saving rate (the share of after-tax income that isn’t spent) fell to 2.6% in the fourth quarter from 3.3% in the third quarter. That compared with 6.1% two years earlier and was the lowest level since 2005, when the housing bubble was at its height.

The Journal’s conclusion is “without wage increases spending growth will have to slow,” and the economy with it.

Mixed Bag

Earlier today, in Weaker Than Expected GDP: Mixed Bag or Worse? I made this claim: “Despite all the crowing about consumer spending, recall that it is occurring only because of an unsustainable drawdown in savings.”

An astute reader commented, “Don’t you expect a drop in savings when 10K people earning good money retire each day?”

That’s a good point. And it is part of the picture, but only a part of it.

I replied “The other side is rising credit card and auto defaults and Millennials racking up purchases they cannot afford (24% still paying Christmas of 2016). The next set of [Christmas credit card] numbers is guaranteed to be worse.”