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US Savings Rate at Lowest Level Since the Great Recession

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Americans are spending money, but it appears they are dipping into their savings to do it.

According to data released by the US Bureau of Economic Analysis, savings last month fell to a level not seen since 2007. The 3.1% rate in September was the lowest since it dipped to 3.0% in December 2007.

In his most recent podcast, Peter Schiff reminded us of what was going on in late 2007.

Now, something that happened in December of 2007 was the beginning of what we refer to as the Great Recession. So, the last time consumers dipped this much into their savings to spend – it ushered in the Great Recession. So, this is not a good indicator. And if you remember too, the government did not acknowledge that recession until almost a year later.”

Meanwhile, spending was up in September. The Commerce Department said consumer spending jumped 1.o% last month. It was the largest spending increase since 2009. But as Reuters pointed out in its reporting, there was an underlying cause for the sudden American splurge – natural disasters.

Consumer spending in September was buoyed by purchases of motor vehicles, probably as drivers in Texas and Florida replaced automobiles that were destroyed when Harvey and Irma slammed the states in late August and early September. Spending on long-lasting goods like autos surged 3.2 percent last month. Outlays on services rose 0.5 percent.”

According to Reuters, higher utility bills also pushed spending upward.

Consumer spending makes up two-thirds of US economic activity. Most of the mainstream reporting spun the increase as a positive for the economy. The Reuters article relegated news about falling savings to the last paragraph. But as Peter pointed out, taking spending and savings trends together does not bode well for the economy.

It means that consumers are fueling their spending not because they’re earning more, but because they are saving less. Or they are depleting their existing savings and taking on additional debt in order to spend more, which is not a good sign for future consumption unless these Americans are simply spending more money because they anticipate big raises, which may be the case. But they may be anticipating something that isn’t going to happen.”

That something Peter is referring to is Trump tax cuts and the benefits many Americans think may come if the GOP can get its act together and pass a reform plan. But as we’ve been reporting, even if Republicans can get it done, the tax plan may not create the economic growth many expect because it will expand the already bloated federal debt.

The drop in the saving rate last month was not a sudden one-time occurrence. As Ryan McMaken reported on the Mises blog, saving has been trending downward for more than a year.

Moreover, the year-over-year change in personal saving has declined for the past seven quarters in a row. During the past 50 years, saving has never been negative for so long, although the saving rate did decline for five quarters in a row during the lead-up to the 2001 recession. It also fell for five quarters in a row in the wake of the 1990-91 recession.”

Peter brought up another point that people rarely talk about. The real savings rate is actually much lower than the official government number. During the housing bubble era, the government revised the methodology it uses to calculate savings.

What the government did is they decided to include a lot of things as savings that prior to that change were not considered savings. And so by making that change, there was a big jump in the savings rate. But of course, there wasn’t an actual change in behavior. We just started measuring savings in a different way so as to have a bigger number. So, if we were still measuring it the way we were back then, the savings rate could actually be negative right now. Because before they made that switch, we actually had the savings rate dip into negative territory.”

McMaken offers some reasons why Americans may be dipping into their savings. None of them give us a lot of optimism for future economic prospects.

The decline in saving could be due to several factors. Asset-price inflation (as with housing prices) may be leading to lower saving rates as homeowners and renters are left with less to save in response to higher monthly payments for housing. Nearly a decade of very-low interest rates may also be encouraging consumers to increase spending. Subprime auto loans, appear to be growing in popularity with lenders. Indeed, lenders are so flush with cash they want to lend that there’s a now a subprime auto-loan program for refugees. And, of course, declining savings could also be due to psychological factors related to the current bubble economy. For many consumers, 2008 now seems like a distant memory. While fear of financial hardship spiked saving rates in the wake of the last recession, many consumers may simply be assuming that there’s little risk of a severe economic shock, so saving ceases to be a top priority for many households.”

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