16 June 2019

Savings Rate Portends Healthy Holiday Spending

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Amid jitters over whether holiday shoppers can give the economy a year-end lift, here’s an unexpected cause for optimism: Americans aren’t feeling the need to save as much. The personal savings rate was on the rise earlier this year, climbing from 4.8% in March to 5.6% in September, the highest rate in nearly two years. But new revisions from the Commerce Department show these gains were illusory. The savings rate was dialed down to 5% in September and held steady at that level in October.

Instead of saving that money, consumers bought more than previously thought, with spending up 2.2% in the third quarter, up from a previous estimate of 1.8%. And behind that spending may be a bit of good news: Consumer sentiment has climbed to the highest level since July 2007.  Higher confidence and increased spending are coming alongside a plunge in gasoline prices, which is further freeing up space in the budget for many families.

If anything, the climbing savings rate represented something of a puzzle. The savings rate usually falls during periods when net worth is rising. Earlier this year, the net worth of U.S. households reached a record $81.5 trillion, according to Federal Reserve data.

That wealth is far from evenly distributed, with much of it held by the richest of Americans. But that shouldn’t effect the savings rate, which is also an average for all Americans, both those seeing wealth gains and those who aren’t.

Some economists would prefer somewhat lower savings, with the logic that it would goose consumption. Others would prefer higher savings to help fuel investment in the economy and leave households better prepared for the future. Both groups would take a stable savings rate as their second choice.

The Federal Reserve is of two minds on the question. It generally seeks to encourage borrowing with its low interest rates, but Federal Reserve Chairwoman Janet Yellen has emphasized the importance of families also having precautionary savings.

Savings have run too low before. In the 2000s, the Commerce Department’s savings rate fell as low as 1.9%, as households borrowed freely, even tapping into home equity to fuel spending. That behavior helped drive an enormous credit boom. Once the bubble burst, many households held little financial buffer.

But with savings rates around 5%, that dire scenario looks unlikely to repeat. Instead, many families are heading to year-end in financial health. The unemployment rate is at its lowest level in more than six years, and wage gains, though slow, have been rising faster than inflation.

At the same time, the recent sharp decline in gasoline prices represents real relief for many families. According to AAA, the national average gas price fell to $2.79 a gallon on Thursday, down from $3.03 a month earlier and nearly 50 cents below the average of $3.28 a gallon at this time last year.

Click here to access the full article on The Wall Street Journal. 

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