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Consumers find thrift, but lose fast recovery
Personal savings rate soars to 6%
Question of the Day
The deep recession and widespread joblessness appear to have taught Americans an important lesson about living within their means and setting aside more money for economic emergencies.
Figures put out by the Commerce Department on Friday show that the personal savings rate tripled during the recession and is hovering at more than 6 percent — a level not seen in decades. Although that newfound taste for thrift is helping to correct some long-standing problems, such as the chronic U.S. trade deficit with the rest of the world, it also poses an immediate obstacle for the economy because it is fueling sluggish growth.
Consumer spending normally is the biggest engine driving growth in the broader economy. It has been tepid throughout the recovery, posting growth at or less than 2 percent since last summer despite major spending incentives enacted by Congress, such as the “cash for clunkers” and “cash for appliances” programs encouraging Americans to trade in their energy-inefficient cars and home appliances.
The uninspired pace of spending growth is averaging half the 3 percent to 4 percent levels seen during the 2000s expansion. That may not be fast enough to push the economy into a sustainable cycle by which consumer spending spurs businesses to hire to meet increased demand, which in turn feeds income growth and enables consumers to spend more.
“A very cautious consumer” is fueling a “sluggish recovery” that is getting further bogged down this summer because of the expiration of federal spending incentives, said Nigel Gault, an economist at IHS Global Insight.
“It leaves a double-dip recession as a possibility,” he said, since businesses are able to keep putting off hiring as long as consumer demand grows so slowly.
The Commerce Department released a number of second-quarter figures Friday, and the broadest of them showed the gross domestic product growing at a 2.4 percent annual rate, compared with 3.7 percent in the first quarter and 5 percent in the fourth quarter of 2009.
The belt-tightening trend among the nation’s famously spendthrift consumers is the “big story” of the recession, Mr. Gault said. Consumers are being “held back,” not only by a scarcity of jobs, he said, but also tight credit and high debt levels and a collapse in housing prices that has eliminated much of the middle class’s main source of wealth.
While American consumers have not faced such a daunting set of spending constraints since the Great Depression, Harm Bandholz, an economist at UniCredit Markets, said he was astounded by the sharp and lightning-fast reversal of long-standing consumer spending habits last year. The trend was even more pronounced in revisions to gross domestic product figures for 2007 to 2009 published by the Commerce Department on Friday.
Consumer spending fell at nearly a 3 percent rate for a full year after the financial market collapse in the fall of 2008, as consumers immediately sensed the gravity of the economic downturn even before they experienced the biggest layoffs. The savings rate rose as high as 7.2 percent in the spring of 2009 — the highest since 1992 — as consumers socked away more of their incomes.
“While we had initially expected such a reaction to the significant wealth loss during the crisis, we were certainly caught by surprise that the U.S. consumer became this prudent overnight,” Mr. Bandholz said.
Mr. Bandholz comes from Germany, where consumers typically save about 9 percent of their income and many people are critical of the profligate spending habits of Americans. But he said the sudden reversal now clouds the outlook for the recovery, since the U.S. economy is driven more by consumer spending and less by exports than the German economy.
“Consumer spending was awfully weak during the first quarters of the recovery” owing to “the significant wealth losses and the ongoing uncertainty about their job and income prospects,” he said. Whether it will be able to break out of this cycle is not clear, he said.
Even with generous government spending incentives this spring, consumer spending rose by only 1.6 percent in the second quarter, led by rebate-driven purchases on appliances and use of legal and financial services as consumers took advantage of a federal tax credit to buy houses. But all of those incentives have now expired.
Mark Vitner, an economist at Wachovia Securities, said he was struck that even as consumers responded to the incentives, they cut back on grocery spending during the quarter — a rare occurrence since food is an essential and not a discretionary expenditure.
“Declines in grocery-store purchases are rare outside of recessions and are a sign of financial stress,” he said. “Consumers are buying more store brands, trading down to less-expensive proteins and buying more groceries at discount stores and membership clubs.”
As a result, he said, he expects economic growth to be “exceptionally weak” this summer, and to average no more than 2 percent for the rest of the year.
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