POINT OF VIEW: Americans’ low savings a big red flag for the economy

News that the economy did all right in 2017 landed on Feb. 2 with a benign thud, but behind that thud lurks a red flag.

For the duration of this economic expansion, consumer spending has been the dynamo driving growth in gross domestic product, or GDP. But now there are indications Americans are getting a little too dynamic.

Their actions are out of whack. For the past two years, spending has risen faster than disposable personal income, as has been pointed out by Jason Furman, a senior fellow at the Peterson Institute for International Economics and a former chairman of the White House Council of Economic Advisers under Barack Obama. For most of the recovery, the two measures remained relatively close. But as the labor market tightens, consumers are getting frisky even though hourly earnings aren’t growing any faster than prices right now.

This surfaces most starkly in the personal saving rate, which is the biggest red flag in the otherwise benign Feb. 2 report. According to Grant Thornton chief economist Diane Swonk, it’s been this high only one other time in history: when the popularity of home-equity lines of credit soared in the third quarter of 2005, at the peak of the housing boom.

Personal saving rate is what the Commerce Department calls the difference between Americans’ income and their spending on goods, services, and taxes, measured as a share of disposable income. Typically, that money is invested in either the stock market or in residences. It doesn’t include capital gains.

Speaking of capital gains, it’s likely that consumer spending is outpacing earnings in part because people feel wealthier and more optimistic, thanks to a frothy stock market and, in some regions, fast-appreciating home values.

According to the Federal Reserve, Americans’ net worth is hitting all-time highs, even after adjusting for inflation. That wealth effect can’t explain everything. At last reading, household net worth wasn’t growing as fast as it had either in previous expansions or earlier in the current one.

Swonk said insurance payments in the wake of Hurricanes Harvey and Irma, as well as the California fires, are also weighing on the saving rate. Those one-time expenditures will also lead to increased cost in the future, she said, as insurance companies are forced to increase rates to cover their losses.

Even more concerning, Swonk said, is increased reliance on borrowing and increased credit-card defaults. Low-income workers, in particular, aren’t able to save more despite the falling unemployment rate. “We are getting more jobs, but the people who are working are getting a lot of low-wage jobs, so they’re not saving because they’re living paycheck to paycheck.”

When you take a looming asset-price bubble, the tax cuts that are juicing growth in the short term, and many of the forces driving lower savings together, you see that “we’re taking growth today at the expense of growth later,” Swonk said. “The fear is that this is like 1999: It was great. Until it wasn’t.”


Editor’s note: Andrew Van Dam covers data and economics for The Washington Post.

Reader Comments ...

Next Up in Opinion

Opinion: Trump’s trade wars would avenge only mythical casualties

America’s government declares “war” promiscuously — on poverty, on drugs, on cancer, etc. — except when actually going to war, which the nation has done often since it last declared war (on June 5, 1942, on Romania, Bulgaria and Hungary). But the incipient war du jour is being postponed. Treasury Secretary Steven Mnuchin...
Opinion: ‘I was wrong’ — the three hardest words in the English language

They might be the three hardest words in the English language: “I was wrong.” Three simple syllables, but many of us find them unpronounceable. As in a Twitter critic who referred to me as “her” the other day. “Her?” tweeted I. Whereupon, she launched into this tortured explanation of how my beard and name were not...
Letters Pro-gun Publix has lost my business

Pro-gun Publix has lost my business Over the past few weeks, I read about the huge donations Publix makes to extremist right-wing candidates, but the final blow came from the over-the-top support for the National Rifle Association and its radical pro-gun candidates too. For a while, I will be inconvenienced adjusting to another grocer, but Americans...
Editorial cartoon
Editorial cartoon

POINT OF VIEW: Restore wetlands, natural shorelines to reduce threat
POINT OF VIEW: Restore wetlands, natural shorelines to reduce threat

Thank you for your recent editorial requesting funding from the U.S. Army Corps of Engineers to update the South Florida Water Management District’s aged flood-control system. (“Aging flood-control systems can’t protect South Florida from sea-level rise,” May 7) I agree with your premise, but I think it is important for people...
More Stories