Increase in U.S. Savings Rate - Will This Doom the Economic Recovery?

The increase in the United States savings rate is a statistic that is being ignored by most people but is critically important.

Since the early 1980s, Americans have been saving less and less. In fact, the savings rate turned negative during the peak of the residential housing bubble. However, it surged to 5.7% in April of this year – a 15 year high. This represents a major trend change that will have a negative impact on any economic recovery.

If you save, the money is put to work by another enterprise. The goal of investing is to end up with more money down the road than you currently have.

Therefore you will be able to consume more in the future than you do today. By following the “save and invest” formula, individuals and countries grow wealthy over time.

Here is an important fact. You grow wealthy by saving and investing. You cannot grow wealth and prosperity by consuming and borrowing.

It was in the mid 1990s when the United States savings rate began to shrink. The reason? Alan Greenspan caused the stock market bubble (the dot com bubble) by lowering interest rates to almost zero. As a result, people felt that there was no need for savings in order to create wealth.

Take a look at the following graph to illustrate my point. In 2001 the savings rate hit zero and continued to go down.

Again, it was the Greenspan loose monetary policy that helped to create the real estate bubble, probably the greatest real estate bubble in history. Here again, people decided that saving money was not necessary. They concluded that borrowing and spending was the key to wealth creation.

When the bubble burst, we entered into the worst economic and financial crisis since the Great Depression. You know the rest of the story. The crisis destroyed the dreams of many Americans.

These bubbles created illusions of wealth. But Americans are finally starting to get it.

People are beginning to realize that spending and indebtedness is not the path to prosperity. Some of them took on an unnecessarily amount of debt.

In many cases, corporation professionals have seen a huge reduction in the wealth they planned to use in retirement. They, along with other Americans, are cutting back on spending and are trying to save for their future.

The savings rate has now climbed to over 5%. This trend will likely continue into the future.

So what does this mean to our economy? An increase in the savings rate means a better long-term future for our country’s economy. It provides a foundation for growth and prosperity.

On the other hand, an increase in the savings rate hurts the economy in the short run. It means you save so you can later consume more. But you must consume less now.

Not only is U.S. consumption/spending being negatively impacted by soaring unemployment rates and the decline in housing prices, it is also being hurt by this increase in the savings rate statistic.

Unless there is an increase in income, it’s impossible for spending to rise while there is a rising savings rate. But overall income levels are falling.

A few years ago when I wanted out of my corporate job, I went through the same experience. I realized I didn’t have enough money to retire so I cut back on spending and tried to save like crazy.

Professionals, wanting to leave their corporate jobs, have no choice but to cut back on their spending – especially if they have been hurt financially by the economic downturn. Since 70% of our economy is consumption based, this reduction in spending must have a very negative impact on the economy in the short run and probably for several years.

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