One of the bizarre statements that is routinely repeated by people who should know better is that consumers are not spending and that is one of the reasons that the recovery has been so weak. The NYT has a piece along these lines this morning. The reason why this argument is bizarre is that consumption is still unusually high, not low.

The saving rate out of disposable income has been averaging just over 5 percent for the last 3 years. This is above the near zero rate at the peak of the housing bubble, but still well below the 8.0 percent average that households averaged for most of the post-war period prior to the growth of the stock bubble in the 90s and the housing bubble in the last decade. (Due to measurement issues, specifically capital gains showing up as income in the national income accounts, the official data likely understate the drop in savings at the peak of the bubbles and the subsequent rise since the crash.)

The predicted result of the ephemeral wealth created by these bubbles would be a surge in consumption, which implies a drop in the saving rate. Now that both bubbles have deflated we should expect the saving rate to return to normal levels or perhaps even somewhat higher as households must make up for the years when they did not save adequately.

This is one of the reasons that competent economists saw these bubbles as so dangerous. Once the economy gets on a specific growth path it is difficult to change courses. Specifically, it is not easy to find a source of demand to replace $600 billion or so in lost consumption coupled with $600 billion in lost bubble-driven construction demand.

Click for Larger Image.

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Source: Bureau of Economic Analysis.

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