On the eve of the last two recessions, American households were unprepared. Years of appreciating stock portfolios, rising home values and improving job prospects had convinced consumers that they didn’t need to save much of their income.
So when unemployment rose and asset prices fell in the downturns that started in 2001 and in 2007, consumers drastically reined in spending and the economy contracted.
Until a few weeks ago, some economists feared history was in the process of repeating itself. Official numbers suggested saving was again out of style as the current expansion enters its 10th year.
Recent data has altered the picture. Households have been saving significantly more of their after-tax income for several years, according to revised data released last month by the Bureau of Economic Analysis.
Take just the first quarter of this year: The agency more than doubled its estimate of the personal saving rate–the difference between disposable income and spending—to 7.2% from the 3.3% estimated previously.
The new number exceeds the 6.4% average rate recorded since 1990, and is almost three times the most recent low of 2.5% in 2005.
The first-quarter changes alone amounted to $613.5 billion in additional saving, at an annual rate, recovered from between the statistical couch cushions—enough money to buy more than 20 million Ford F-150 pickup trucks or more than 600 million iPhone Xs.
While slight adjustments to economic data are common, the revision to the personal saving rate was the biggest since at least 2002.
“That was an amazing set of revisions,” said economist Joel Naroff, who until recently thought consumers were “largely tapped out” and represented a major risk to the economic outlook. Now, he says, the picture is “a lot less negative.”
It is likely that the 2007-2009 recession scarred consumers and left them more determined to sock away funds, economist say. It cost millions of jobs and debunked many Americans’ belief that the value of their homes would never fall.
“I don’t buy as much junk, you know, trivial stuff that doesn’t matter,” said Becky Groves, 61, a social worker who lives in Grand Junction, Colo. She said the financial crisis motivated her to save more in recent years. “I pay bills and buy food, and then I keep a little bit out and the rest just goes into savings.”
Bolstering the hypothesis is the fact that the revised saving rate shows virtually no decline since 2013, even though unemployment has fallen by roughly half and home and stock prices have risen sharply.
This contradicts “what was thought to be one of the more reliable regularities in macroeconomics,” the so-called wealth effect, said J.P. Morgan Chief U.S. Economist Michael Feroli. The theory holds that consumption rises and saving falls as household wealth climbs.
If the wealth effect observed before the Great Recession had played out in the years since, Mr. Feroli estimates that the saving rate would now be around 2% and that annual consumer spending would have grown about 0.5 percentage point faster than it did.
“There’s a little more frugality,” Mr. Feroli said. “Maybe people are a little more cautious, a little more aware that there can be rainy days.”
With household behavior defying some long-held conventions, economists are now puzzling out what the stronger saving trend means for consumer spending and economic growth.
Personal consumption rose at an annualized 4% clip in the second quarter, a rate that economists say is unlikely to be sustained as the immediate effects of Republican tax cuts wane.
Some economists now expect a more gradual spending slowdown than before the saving data were revised. Goldman Sachs foresees consumption rising at 2.4% a year through mid-2019, up from a previous forecast of 2%. The difference would amount to about $58 billion in extra spending on cars, health care and other goods and services.
Mr. Feroli isn’t changing his spending projections, but he said the saving revisions give him comfort households are less stretched than they were in the years before the last recession. That may imply a more resilient economy.
Others are more circumspect.
“The consumer may be on slightly stronger footing than we previously estimated,” said Lindsey Piegza, chief economist at Stifel. However, she said, consumption is driven fundamentally by jobs and incomes.
Wage growth, she warned, has been surprisingly modest given how low the unemployment rate has fallen. For that reason, she still sees a consumer-spending slowdown in the second half of this year.
It is also unclear whether lower- and middle-income households, which spend the vast majority of their incomes, are much better off than previously thought. Most of the newly discovered income that prompted the BEA’s revisions came in the form of interest, dividends or business owners’ profits, rather than wages.
This suggests the newfound savings may have been concentrated in wealthier households.
“The uneven distribution of income flows in this country may be shifting up the savings rate…But that doesn’t mean lower- and middle-income households are saving a whole lot of money,” Mr. Naroff said.
Write to Paul Kiernan at email@example.com
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