Consumers Are Saving, Now?!

The United States' personal savings rate jumped in the second quarter of 2008 with Americans saving 2.5% of their disposable income. This noted surge was followed by a rate of 1.2% in the third quarter and then 3.2% in the fourth quarter! These higher rates come after hitting a negative savings rate in 2005 for the first and only time in over 50 years of data collected by the Bureau of Economic Analysis. The savings rate crossed the 10-year moving average for the first time 20 years.

The most surprising aspect of this jump in savings is the current economic conditions and government policy. The Federal Reserve's expansionary monetary policy is not persuading consumers to be spendthrifts. Rather, with the Federal Funds Target Rate below 1%, consumers chose to save even though they were hardly paid to do so. Monetary policy theory would dictate that lowering interest rates would spur greater spending and less saving. Yet, consumers appear to be very worried about their personal financial situations as the US falls deeper into seemingly one of the worst recessions in decades. The worrisome aspect for the Fed is that expansionary policy is not inducing consumers to save less and spend more thus making their main tool ineffective in stimulating economic growth. While increased savings rates is positive over the longer-term with 76 million baby boomers beginning to enter retirement, it will cause pain in the short-term. If the consumer continues to save at higher rates, this may be a more protracted recession than previously thought.