'Frugal Consumer' Era Continues: U.S. Savings Rate Rises to 4.8%

Posted Feb 1st 2010 4:15PM by Joseph Lazzaro
Filed under: Recession

The key data point in December's personal income and outlay data? Arguably, the U.S. savings rate, which rose to a 4.8% annual rate -- the highest since June 2009 -- and up from 4.5% in November, the U.S. Commerce Department announced Monday.

In other words, the era of the 'frugal consumer' continues. Also in December, real consumer spending rose at the slowest pace since September, moving up just 0.1%, the Commerce Department said. In Q4, real spending rose at a 2% annual rate; however, real spending is down 0.5% since December 2007, or when the recession began roughly two years ago. Further real, after-tax incomes rose 0.3% in December.

But the tell-tale stat for investors is the savings rate: despite only modest increases in real incomes, the American people continue to sock-it-away to rebuild nest eggs hurt by the stock market sell-off and housing bust. Americans are also saving more, many economists agree, due to an uncertain economic outlook: with two, positive GDP growth quarters under its belt, the nation's recession appears to have ended in Q3 2009, but the job market, a lag indicator, has not turned yet -- a condition that historically has resulted in a more-cautious stance by consumers.

Economic Analysis: The upside to the higher savings rate? Improved personal balance sheets, and more money available for investment. After a decade of overconsumption, Americans are finally saving at appropriate levels, and there's little to suggest the trend will change anytime soon.

The downside? Consumer spending will not be the robust engine of U.S. economic growth that it has been historically. In fact, if consumers pull back spending too much, a double-dip recession could result.

Bottom Line: The U.S.'s high savings rate underscores the need for consumers in faster-growing emerging markets (China, India, Brazil, Russia) to take up the consumption slack: consumption by these international consumers is needed to maintain an adequate global GDP growth rate. The American spending component won't be able to do it alone.

Tags: inthenews, savings rate