Friday, 1 February 2013

Some Great News for the U.S. Economy: Private Savings Rate jumps to 6.5%

Economists advocating increased consumer spending might disagree, but the U.S. Department of Commerce today released some great news for the U.S. economy. The personal savings rate for December 2012 jumped to 6.5% from the 3.7% average for the preceding 11 months of 2012.

This increase in the personal savings rate is great news as savings is an integral ingredient on the path to achieving a stable and prosperous economy for the longer term. Growth driven by savings is inherently more stable than growth driven by easy credit (i.e. leverage) as for example was the case leading up to the U.S. housing bubble. Savings, or the restriction of consumption compared to the amount that could be consumed, is a necessity for the formation of capital, or investments.

Apparently, "economists say higher income [for December 2012] is due to one-time dividend distributions and will reverse sharply in January" (see here). This increase in income, leading to the highest disposable personal income ever recorded in the U.S. (see bottom chart) then caused the increase in savings and hence the savings rate. Nonetheless, the savings rate increased 2.1% points on December 2011 and presumably there were paid some dividends back then as well so the increase is still good news even if it is a once a year event.

The personal savings rate in the U.S. has remained below 6.0% on average since 1993 so there is a long way to go before one can conclude the U.S. is not a credit-fueled consumer spending nation anymore and claim that the current levels of consumer spending is sustainable and just shorter term spending growth driven by credit expansion.

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