Friday, December 23, 2011
Personal saving hits lowest level in four years
Households have been drawing down savings as incomes stagnate. Savings can only fall for a period of time before people start cutting back consumption to rebuild those savings.
In 2007, just before the economy crashed, the savings rate had fallen to 2.0%. What followed was a pullback in consumption that weakened the economy and contributed to the overall downturn.
The savings rates is now down to 3.5% (down from a peak of 8.3% in May ’08). While 3.5% is better than 2.0%, unemployment is still far higher than it was in 2007, so it’s reasonable to think that 3.5% (or thereabouts) may be the new, 2.0%. Incomes have to rise from here for this trend not to become problematic.