Have We Stopped Saving Already?
|August 18, 2009||Posted by Roshawn Watson under Uncategorized|
Well it is finally happening. With the apparent positive turn in the economic tide, the shock and fear that drove consumers’ purse strings and wallets shut is also wearing off. For over a year, people have been talking about a new wave of frugality sweeping through America. However, if this frugality was just a side effect of fear over the decimated economy, will it last now that people are beginning to use that other r-word: recovery?
Three months ago, we asked a pertinent question: ls Recession-Induced Frugality Sustainable? For example, we rediscovered the art of savings. Goldman Sachs predicted 2009 savings rates to be between 6-10%. 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. While it would be great for financial temperance to become the new norm, we knew that this unfortunately might be too optimistic. Recent data from the Bureau of Economic Analysis suggests that Americans may be saving less again, as our personal savings rate (as a percentage of disposable income) fell to 4.6% in June, compared with 6.2% in May. Now, it is true that even June’s 4.6% is still a lot better than the negative savings rates we had a few years ago, one must wonder if the drop in savings is a signal our former ways of reckless spending will return.
It is possible to read too much into this though, after all this is just two months’ data. However, even if you believe these two months are indicative of the present trend in spending, there are some recent events that might be confounding this data. For example, May was when some individuals received their federal stimulus checks, which would help spruce up savings for May and make June look particularly worse by comparison. Additionally, 4.6% represents savings as a percentage of disposable income, and June marked the fourth consecutive month that personal incomes decreased. This is partly due to job loss and underemployment. These are indeed important considerations to remember when interpreting the data.
Financial Abstinence Is Not An Option
Additionally, unless you are Daniel Suelo and willing to live in a cave, you have to spend some money. Just like a food addict, total abstinence is never a viable option. It was inevitable that we started spending again. This still doesn’t mean that we couldn’t retain the lessons of frugality, and the lack of retention is what is particularly troubling. Programs such as Cash for Clunkers that induce people to trade in their working cars to purchase new cars that they most likely cannot afford appear to be a step in the wrong direction. Such debt-driven spending may be great for the auto industry and even temporarily for the overall economy, but as Suze Orman said nearly a year and a half ago, what you have to be concerned about is your personal economy.
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Copyright 2012, Roshawn Watson, Pharm.D., Ph.D. All Rights Reserved.