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Home Publications Blogs Beat the Press Consumer Spending Continues to Be High, Not Low

Consumer Spending Continues to Be High, Not Low

Friday, 03 December 2010 05:56

The Washington Post repeated the story that consumers have been reluctant to spend due to the bad economy. In fact, the savings rate has hovered around 5.0 percent through the last 2 years. This is well below the pre-stock bubble average, which was more than 8.0 percent. This implies that consumers have continued to spend at an unusually rapid clip, albeit not as fast as when their spending was driven by $8 trillion of housing bubble wealth.

The article also implied that house prices are no longer falling. This is not true, the September Case-Shiller 20 City index showed that prices were falling at an 8.5 percent annual rate. This would eliminate more than $1 trillion in housing equity over the course of a year.

Comments (5)Add Comment
written by AndyfromTucson, December 03, 2010 6:14
If you look back at the Great Depression the savings rate actually fell during the depths of the depression because people, on average, had to dip into savings to buy necessities. There is probably some of that going on right now among the unemployed, which is offsetting some of the increase in the savings rate due to loss of housing wealth. As the economy slowly recovers I wouldn't be at all surprised if the savings rate actually rises a bit as some people no longer have to dip into savings for day to day necessities and start saving. Of course if the savings rate drifts up as the economy grows it will tend to moderate the pace of growth.
written by skeptonomist, December 03, 2010 11:03
Here is the graph of the BEA data:


Savings rate declined steadily since about 1982 when it was actually over 10%, and it jumped up from around 2% to over 5% in the current recession.

The steady 25-year decline 1982-2007 is difficult to attribute to the stock market since most people don't directly own stocks, and there is no evidence of a separate effect from the housing bubble.

The WaPo may be right that spending has dropped since 2007, but would it be a good idea to go back to a 2% savings rate? There are interesting trends in the data (why was saving so high during the inflation of the 70's and 80's; why is this recession so different from the Depression and the 1981 recession?) which deserve more than casual explanation.
written by Ron Alley, December 03, 2010 12:48

I am not certain, but I think savings rate is, in effect, this year,s savings divided by this year's income.

However, if we look at real income increase, I think an adjustment is made for inflation. My understanding is that real income has declined since about 1980 for most of us.

I wonder what the savings rate would be if it also were adjusted for inflation. Any thoughts?

I think a real savings rate would be more persuasive than a current year savings rate.
28 years
written by jwo, December 03, 2010 12:58
Ron Alley,
People seem to have a lot more and better stuff now than they did in 1980 and considering that it has been 28 years they surely could have adjusted saving to lower income by now. With lower income I might save a higher % on income. I am thinking that investment (or perceived investment) is a big part of the answer.
written by PeonInChief, December 04, 2010 11:45
Looking at the figures, one thing that strikes me is that the decline in the savings rate really gets going around 1992. It's possible that this decline simply represents the boomers' greater expenses for housing, health care and their kids' education. Their parents, who had a higher savings rate simply because they'd paid in pre-inflation dollars for their housing, are dropping out of the picture.

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.