Weak Savings Numbers

This week the Commerce Department released its May data on retail spending. And the numbers were very weak. Some of the pundits and economists interviewed in the Post and the Times were concerned about that, but don’t get scared. Actually the numbers strike me as normal, based on what we have gone through recently.

Before the collapse of 2007-8, consumer spending was wildly out of proportion to our actual wealth. It was expanded by the $8 trillion in (inflated) housing wealth. People believed that they had beau coups of extra money because the real estate pages told them that the price of their homes had doubled in the last five years, so gobs of them took equity out of their homes in the form of refinancing and spent that money, which then sent consumption sky high and pushed saving rates down to record lows.

But now we’re on the down hill side of all of that and consumption is returning to more normal levels. As a rule of thumb, consumption typically increases by 5-7 cents for every dollar that the value of your house goes up. This is sometimes called the “Housing Wealth Effect.” During the housing bubble, that consumption number took flight into Twilight Zone numbers, but now it’s back down to roughly where it should be.

The bigger concern to me is that the savings rate is around 4.0 percent, and that is below its levels before the stock and housing bubbles, which averaged more than 8.0 percent. In fact, with most of the huge baby boom generation in its 50s and early 60s, and with bupkis saved up for retirement, one would think that there would be a lot of people stashing away more money right now to save their butts later. But we aren’t Consumption is still relatively high, even as out incomes have gone down and the values of our houses have gone down.

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