Why thrifty Americans are saving at a time when economy needs spending

It wasn't that long ago that many economists worried that Americans were saving too little. Today, the growing concern is that Americans are starting to save too much.

It's not that the savings rate today is high by historic measures, or by comparisons to some other countries. But it has moved sharply higher in recent months - at a time when what the economy needs most is for consumers to be spending more freely.

"In the long-term, it's best for Americans to save more. But right now, with the economy underwater, it's the worst time for that," said Rich Yamarone, director of economic research at Argus Research.

The savings rate, as calculated by the Commerce Department, hit 3.6 per cent in December, or the equivalent of $36 (Dh132) for every $1,000 (Dh3,673) of after-tax income.

That's up from 0.8 per cent in August, or only $8 of every $1,000 of income. And since the average income for Americans is flat to slightly down during the past few months, the only way the savings rate can rise is for spending to fall.

"That's a lot of spending that's not happening," said Mark Zandi, chief economist for Moody's Economy.com.

He said the jump in the savings rate since last summer is "the difference between an economy that is growing and one that is struggling mightily."

The government calculates savings by totalling up after-tax income and subtracting spending.

The remainder is considered savings by the government even if consumers are using the leftover money for investing or paying down debt instead of saving it in a bank.

In months when income spikes due to special circumstances - such as May 2008, when most taxpayers got economic stimulus checks of between $600 to $1,200, and December 2004, when Microsoft paid investors a big one-time dividend - that can cause a significant jump in the savings rate. But excluding those months, the savings rate this past December was the highest since September 2001.

Until the economic upheaval of the past year, the savings rate was at historic lows, averaging only 0.5 per cent from the start of 2005 through April 2008.

The savings rate occasionally even fell below zero, indicating that Americans were dipping into savings to keep spending at a high level.

Keith Hembre, chief economist for First American Funds, said the low savings rate earlier this decade was due to consumers spending beyond their means for years.

And they could afford to do so as long as the stock market was rising and surging real estate prices allowed people to turn their homes into an ATM machine that consumers thought had a limitless supply of money.

But once the stock market and housing market bubbles burst, Hembre said consumers had no choice but to spend more modestly. "I think we're at a secular shift here in terms of consumption and broader spending behavior," he said.

Some say the sudden rise in the savings rate since last summer is due primarily to Americans worried about their jobs and the economy.

In addition to the desire to save more, Americans are seeing their access to credit cut off, which is raising the savings rate as well.

Plunging housing prices have made it difficult for many to tap home equity lines of credit, and lenders have also tightened standards for credit cards.

Figures from the Federal Reserve show that consumer debt fell for the first time on record in the third quarter. Since then, consumer borrowing has continued to decline.