Frugality Forecasts Look a Bit Generous

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Wall Street Journal

By: Kelly Evans

March 1, 2010


New frugality? Not so fast.

A sharply higher U.S. household-savings rate was expected to be one of the lasting effects of the Great Recession, given the collapses in real estate and the stock market. But the adjustment has so far been tamer than expected.


The personal-savings rate measures the percentage of after-tax household income that is unspent in a given period.


It reached 5.4% in last year's second quarter, up from a low of 1.2% during the boom, according to the Commerce Department.


On Monday, the government is expected to announce that the rate hovered between 4% and 5% in January, roughly in line with recent months.


The stall has prompted some economists to rethink their original estimates of household-saving behavior. Harm Bandholz, an economist at UniCredit Research, says the stock market's recovery and signs of stability in home prices have kept the rate from rising to the 6% level he anticipated.


John Ryding, chief economist at RDQ Economics, points out that household net worth grew by $5 trillion between the first and third quarters of 2009, the latest data available, after a sharp decline earlier in the recession.


Additional spending generated by the rebound helped keep the savings rate from climbing to 7% or 8%, he says.


Household savings help foster long-term economic vitality, but a swift upward adjustment makes consumer-

spending growth much more difficult to achieve in the near term.


That is a phenomenon known as the "paradox of thrift."


If the savings rate continues its holding pattern or rises gradually, it would remove one of the headwinds to consumer-spending growth in the coming months.


That would be a bullish sign for the economy in the U.S., because consumer spending accounts for roughly 70% of gross domestic product.


With credit still tight and household net worth below boom-era levels, a genuine consumer-led recovery has to be fueled by income growth, which has barely budged in the past two years.


"We need jobs," Mr. Ryding says.


But at least the savings rate is a sign that investors might want to think twice before betting against U.S. consumers.


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This page contains a single entry by Ernest Roberts   published on March 1, 2010 4:25 PM.

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