By Mack Wilowski, National News Editor
According to the Bureau of Economic Analysis, the U.S. personal savings rate, which measures the proportion of households’ after-tax disposable income that is saved, recently fell to a 10-year low of 3.1 percent as of October 2017, down from a post-recession peak of 12 percent attained as recently as 2012. A combination of positive economic factors, among them low unemployment, soaring equity prices, and a moderate pace of growth have all contributed to rising consumer confidence and optimism among households. This increase in optimism regarding future economic prospects, as reported by the Wall Street Journal, have enticed people to spend more of their disposable income in anticipation of further employment and wealth gains. Consumers have ramped up their purchases of durable goods, such as cars and large household appliances. Although the national savings rate has fallen considerably since late 2015, it is not the first time the gauge has remained below 5 percent for a prolonged period. It reached similar levels during the late 1990’s and 2000’s decade, also very favorable periods for investors in equity markets – with the lowest reading on record dropping to 1.9 percent in the summer of 2005, in the run-up to the housing bubble and bust.
Meanwhile, the national Consumer Confidence index, released on a monthly basis by the Conference Broad, hit a 17-year-high in October and remains only two percentage points below the December 2000 reading. A similar report conducted by the University of Michigan found household confidence on the state of the economy to be the highest since 2004. Richard Curtin, the chief economist supervising the survey, commented in an interview with CNBC: “Lingering doubts about the near term strength of the national economy were dispelled as more than half of all respondents expected good times during the year ahead, and anticipated the expansion to continue uninterrupted over the next five years.” In addition to a broad, uninterrupted appreciation in stocks throughout the year, greater net worth of U.S. households and rising median incomes have contributed to greater spending activity, with the total net worth of households – the value of all personal assets minus total debts – rose by $1.7 trillion in the April-June period alone to $96.2 trillion. With the new tax plan projected to take effect by early 2018, individuals are also factoring in tax reductions into their personal financial outlook. Property values have continued to rise as individuals spend more money on home improvement and upgrades to existing property, as shortage of houses available for sale has reduced the rate of new home purchases.
Although a falling national savings rate, directly attributed to rising consumer confidence, can be a signal of strength and prosperity, it exposes potential dangers building in the financial system and the economy as a whole. It often presents itself a sign of complacency and lack of caution among individual investors and households. Especially as the stock market continues to breach all-time highs on a weekly basis and the price – earnings ratio of many U.S. corporations is already well-above historical norms, some parallels can be drawn between the current period and the run-up to the technology and housing bubbles. In both cases, the national savings rate remained below 4 percent for several months at a time, and the bursting of both bubbles substantially depleted households’ disposable income and financial resources. On a positive note however, economists at S&P Global Ratings, in an interview with the Wall Street Journal, expect a short-term pickup in the savings rate in upcoming months as households in storm-afflicted regions recoup their financial losses and reorganize their assets as the recovery process continues.
Even with the economy progressing at a respectable rate, some sectors of growth – especially workers’ wages and compensation, are showing slower rates of expansion. Despite the low rate of unemployment, which recently fell to a new post-recession low of 4.1 percent, wages and inflation have remained below the level targeted by the nation’s central bank, the Federal Reserve. The core rate of inflation has averaged close to 1.5 percent per year versus the 2 percent rate preferred by the Federal Reserve. With President Trump’s nominee for Federal Reserve chair, Governor Jerome Powell, set to assume the role in February 2018, the current inflation and wage conundrum will continue to be a priority of the Fed as it continues to pursue a gradual pace of increases in the Federal Funds rate. For now, however, the state of the economy is likely the most favorable it has been throughout the post-recession period.
A version of this article appeared in the Tuesday, November 7th print edition.
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