By: Roshawn Watson
New data suggests that Americans are saving less and spending more, as the vicious economic cycle repeats itself once again. In the last quarter, the savings rate was approximately 3.1%, a steep decline from last year's 12-year high of 5.4% during the same quarter. Moreover, our expenditures increased and is outpacing our personal income. It appears that despite proclamations that our newly-embraced frugality reflected a permanent change in behavior, frugality, for many, was a passing fad induced by momentary fear, not a substantive shift in consumer spending.
Earlier Than Expected
We certainly hyped the newly-found frugality to obnoxious levels. Nearly, eighteen months ago, I recall reading an article in Business Week that made the case that our "new found austerity could...rewire Americans as savers rather than spenders." One economics professor from the University of Wisconsin suggested "consumers won't be in a position to spend freely for five years.” Business Week certainly wasn't alone in this perspective. Barbara Dafoe Whitehead of the Institute for American Values and co-author of For a New Thrift: Confronting the Debt Culture said
“a turn to savings and wiser spending may persist for a long time... Like the young who came of age during the Great Depression, today’s young people may be deeply imprinted by the experience of the economic collapse. This formative memory is likely to foster more careful spending and saving in years to come -- as it did for the Depression generation.”
Sure, we did temporarily embrace a more heightened sense of fiscal responsibility. For example, we rediscovered the art of saving. We even went from record high debt-to-income ratios in 2007 to the American debt load shrinking in 2008, which is the first time American debt has shrunk since 1952. However, a knee-jerk reaction causing us to briefly pull our purse strings isn't of the same magnitude as the generational imprinting that Dafoe had hoped for; alas the sustainability of the recession-induced frugality has been in question for some time.
It's Just Like Food
Just as with food, total abstinence from spending is not a viable option. Thus, it was expected that spending would resume once we got over the shock and awe from the precipitous declines in net worth (26% decline in most Americans), prompted by job losses, home value declines, and paper asset value declines. With our spending up and savings down, it appears that our financial temperance may also be abating.
Spending certainly benefits the economy, as consumer spending makes up 60% of the economy. Accordingly, if you want to fund our economic recovery with the contents of your wallet, be my guest. The problem arises when we rely on the destructive habits of financial excess and self-indulgence to fuel the economy because such behavior simply cannot persists long-term without a crash. Of course, wise spending is good, just like appropriate eating. Remember, there is no direct conflict with frugality and capitalism. Frugal people are consumers too but would rather just spend their money wisely instead of being wasteful, even if it means purchasing something that has greater total costs but also has greater value. My friend over at Eliminate The Muda is the perfect example. Earlier this week, he wrote of buying the more expensive Kodak printer ink because it reduced their overall printing costs per page. That epitomizes the thought process most frugal people go through, and such spending not only stimulates the economy but ALSO will persist during boom AND bust cycles. Indeed, if we were all more frugal, I submit to you that we would eliminate so much of the volatility associated with our economy. Frugality would drive innovation and prove to be a more stable long-term economic model.
How Well Is the Economy Doing Anyway?
We have been hearing mummers of a possible double-dip recession for several months now, even from prominent economists such as Dr. Nouriel Roubini. Unemployment is still in the double digits. Interest rates are still ridiculously low (good if you are a borrower but bad if you are a saver). We really don't know what the real estate market looks like because it has been propped up so much by the stimulus. While I certainly don't mean to promote doom and gloom, I just want to echo the admonishment to be cautious and don't just blindly accept the sound bites that the economy is doing well. While it is certainly doing better than it was prior to March 9th, 2009, consider the comparison. It's easy to do better than last year when asset values dropped off a cliff between October 2008 and March 2009, so such comparisons are not saying that much in most cases.
Lastly, I know that because the savings rates are so low, the obvious interest income incentive is gone. I have accounts that were earning over 5% APR now at 1%. However, consider another benefit of saving: economic stability. As the last market correction appears to have shaved off between 6-9% of the Dow, such stability is a welcome change.
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