At the time the last two recessions began, nobody was prepared. Things were going well: Stock portfolios were appreciating, home values were rising and job prospects were improving as well. When the economy took a downturn in the years 2001 and 2007, spending abruptly halted and the economy contracted. Many economists believe that the same lack of preparedness would occur again if we were to experience another downturn or market correction — a possibility since the economy has been steadily growing for 10 years. Namely, that there would be a lack of personal savings to see people through a recession. But, according to revised data released last month by the Bureau of Economic Analysis, it just might be the case that, contrary to popular opinion, Americans are actually doing a very good job of saving.
The Personal Savings Rate
For the first quarter of this year, estimates of the Personal Savings Rate stood at 3.3 percent. The data has since been revised to reflect a Savings Rate of more than 7 percent. This new number is almost triple the most recent low of 2.5 percent recorded in 2005.
As for the grand total of savings recorded for the first quarter alone, they amounted to more than $613 billion. According to The Wall Street Journal, this would be “enough money to buy more than 20 million Ford F-150 pickup trucks or more than 600 million iPhone Xs.” The revision to the Bureau’s data has been the single greatest change since, at least, 2002.
Why the change?
It is more than likely that the two previous recessions have traumatized consumers, leaving them more cautious than in previous years. The last recession disillusioned American consumers about certain widely held ideas, for instance, that the value of their homes would never fall.
“I don’t buy as much junk, you know, trivial stuff that doesn’t matter,” Becky Groves, 61, a social worker who lives in Grand Junction, Colo. told The Wall Street Journal. She said the financial crisis motivated her to save more in recent years. “I pay bills and buy food, and then I keep a little bit out, and the rest goes into savings.”
The saving rate hasn’t declined since 2013, despite the reduction in unemployment by half and the sharp rise in stock prices. The idea that, as wealth always rises, spending will rise and saving will always fall has not proven to always be true. “There’s a little more frugality,” J.P. Morgan Chief U.S. Economist Mr. Feroli told The Wall Street Journal. “Maybe people are a little more cautious, a little more aware that there can be rainy days.”
What it means for economic growth
Many economists expect the spending to slow down more gradually than when the data was revised. And Goldman Sachs predicts consumption to rise by 2.4 percent a year through mid-2019. Up from a previously forecast 2 percent. The difference would amount to about $58 billion.
Mr. Feroli believes that the revised data shows that Americans might be less strapped for cash than they originally predicted. This may very well forecast a less fragile economy, but others are less sure.
“The consumer may be on slightly stronger footing than we previously estimated,” said Lindsey Piegza, chief economist at Stifel in The Wall Street Journal. However, she said, consumption is driven fundamentally by jobs and incomes. Piegza warns that wage growth has been very modest commensurate with how low the unemployment rate has gone. And, for this reason, she still expects a consumer-spending slowdown in the second half of this year.
The economic downturns of 2001 and 2007 caught consumers by surprise and without sufficient savings to weather the economic tumult. It is possible that Americans learned from their mistake. Despite a strong economy for the last 10 years, consumers appear to be more savvy about the possibility of an economic downturn. They are saving at a rate that surprised economists. At a savings rate of 7 percent, as compared to the 2.5 percent rate in 2005, Americans appear poised to be protected from the economic ravages of the last recession, and that is a very good thing.
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