Savings rates are on the rise—job losses combined with wealth destruction (from collapsing housing and stock prices) have forced people to reduce spending and boost savings. Savings as a percent of disposable income has risen from below 0% to the 5-6% range. In fact the 5.7% savings rate in April was the highest in 14 years.
Some commentators argue that with savings rates now close to historical norms (of 6-7%) we should soon see renewed spending, providing another boost to recovery. But this makes little sense—in this environment, people cannot maintain higher savings rates and increase spending at the same time.
An even more telling argument against a revival of spending is the continuing heavy household debt load. The chart below (which comes from Business Week), shows household liabilities (mortgage and consumer debt) as a percent of aftertax income. Recent spending cutbacks have indeed produced a decline in the debt ratio—from 138.6% in the fourth quarter of 2007 to 131.1% in the first quarter of this year. But as the chart makes clear, this process has a long way to go.
Reports from the Economic Front 