The Washington Post
By: Frank Ahrens
June 29, 2010
Americans socked away more savings in May than at any time since September, as they continued to be cautious spenders, according to government data released Monday.
According to the Commerce Department, the personal savings rate in May -- the part of every paycheck that goes unspent -- rose to 4 percent, the highest amount in nearly a year, as worried consumers saw stocks tumble in the United States and debt problems spread across Europe.
Though virtuous, an increase in personal savings creates a paradox for the gross domestic product, 70 percent of which is based on consumer spending. The personal savings rate dropped to barely more than 1 percent in 2005 when the housing boom was at its height, as consumers borrowed from their homes to buy goods. This pushed the economy higher, but left consumers cash-poor when the housing bust hit and unemployment left nearly 10 percent of Americans out of work.
Now, consumers are saving again. And, as this is so far a jobless recovery -- the June unemployment figure, due out Friday, is forecast to remain unchanged at a very high 9.7 percent -- hopes for a recovery rest in consumer spending.
The Monday data came shortly after top government officials from around the world left the Group of 20 summit in Toronto and as they are considering whether to extend or pull the plug on taxpayer-subsidized stimulus spending. One choice drives debt higher; the other threatens to kneecap a wobbly economy.
In May, consumer spending rose only 0.2 percent compared with April, which was unchanged from March. Historically, this is a weak showing. Spending has been rising at a rate of 2.5 percent per quarter since the recession ended last year. That's less than half of the growth that followed the deep recession of the early 1980s.
Stagnant wage growth is partly to blame. Personal income in May rose by only 0.4 percent, which was less than expected. More worrisome is the fact that almost all the wage growth is coming either from the government -- via temporary census jobs, which will end when the decennial count concludes in the fall -- or from businesses that have received government stimulus funds. In short, very little growth is coming from the private sector.
Miller Tabak equity strategist Peter Boockvar wrote that forecasters and government policy-makers should see the trend toward consumer savings as a long-term one, as "consumers rely less on asset prices to drive spending decisions and more on income earned and saved." This means that consumers will be less apt to buy things just because they're on sale and more likely to make a decision based on whether they can afford a good or service.