Monday, May 3, 2010

The Trouble With the Savings Rate

In the flurry of economic reports released this morning, one particular piece of data received relatively attention: the decline of the personal savings rate to 2.7% in March.


Although the Q1 GDP report last Friday had already shown a drop in the savings rate to 3.1% for the entire quarter- from 3.9% in the prior two quarters and a cycle-high of 5.4% in Q2 2009- this morning's drop to the lowest monthly level in 18 months is a telling development.

The decline in the savings rate in March confirms a downward trajectory in the series over the last six to nine months and validates the earlier suspicion that the spike in the rate around the middle of 2009 was largely a reflection of circumstantial factors- namely, income transfers related to the fiscal stimulus, and a more defensive approach of households in the midst of a deepening recession.

As personal consumption started coming alive in the second half of last year and reached a robust annualized rate of 3.2% in the first quarter of 2010, the savings rate has been steadily drifting lower, gravitating again toward the disappointingly low 2.0 to 2.5% range that had prevailed for the better part of the last 10 years. The downtrend in the rate dispels any hopes expressed in some quarters last year that a new paradigm of an overall higher savings rate may be emerging, which, although it might act as a headwind for the fledgling recovery, would tend to correct one of the major imbalances in the U.S. economy in the last two decades.

At the time, we had expressed reservations as to whether a deeply entrenched into the psyche of the American consumer culture of spending was about to enter a truly new, more prudent phase ( Inasmuch as the savings rate is a notoriously revisable series (often after many years following the originally released data) it now appears that with the increasing recognition of an improving economic environment, consumers are slowly reverting to past habits, the only redeeming value of the latter being that they are helping to solidify spending and the impetus of the recovery at this juncture.

Anthony Karydakis

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