US Savings Rate Up – Does it matter?

According to a report in last week’s New York Times, the Federal Reserve reported the US savings rate jumped 6.9% in May the highest since December 1993. The amount saved - $768.8 billion - was the most on records that started in January 1959.

There are two views on this.

View #1

“Once consumers feel a little safer about the economy and their own jobs, they are going to spend some of their savings” predicted John Canally, Economist at LPL Financial, adding that he did not see recent changes in consumer behavior “torpedoing the recovery.”

View #2

“One legacy of the current recession, however, may be the longer-term dulling of both these forces (rising bond values and easy credit. Editor) Americans have taken a huge hit in net worth that may take years for them to recover. And given Washington’s proposals for revamping the banking system, financial transactions will probably be more tightly regulated, and credit may never be quite as freely flowing as it was during the bubble heyday,” says Catherine Rampel.

My View

I’m with Rampel until something really strategic changes. So, downgrade your business model assumptions that show a fast return to previous consumer spending levels.

Here’s why

Rampel questions if the increase in the savings rate is impressive. She concludes that it is not, at least in historical terms. In fact, it’s about equal to the average savings rate of the last 50 years according to Rampel.

Rampel goes on to say. “As you can see, the long-term average has primarily been dragged down by Americans’ savings behavior over the last three decades. Not too long ago, in fact, the personal savings rate was even negative, indicating that Americans were spending more than they were earning.”

“While savings behavior is somewhat driven by the business cycle — savings rates tend to go up when times are bad — there have been a few longer-term, secular forces that have probably motivated Americans to save less and less of their income.”

“One, their net worth’s were rising, thanks to a bond rally, a stock market rally and rising home values. On paper, as in their 401(k)s, they were worth more, so they felt they could spend more with little need to continue funneling huge chunks of their paychecks into the rainy day fund.”

“Two, credit became increasingly easier to come by, particularly after deregulation of the late 1970s and 1980s (as well as the housing bubble, which allowed Americans to treat their homes like A.T.M.’s). Why save up for a big purchase like a car or a house when you knew you could just finance all or most of it? In other words, we will probably exit this recession with much higher savings rates than we had going into it. “

I’m with Rampel, at least for now.