Saving Ourselves from Recovery?

Saving Ourselves from Recovery?

Newly-released data reveal that U.S. consumers are accumulating savings at a rapid clip. In the space of about a year, the personal savings rate has climbed from just above zero to nearly 6 percent-reaching its highest point since the early 1990s. During no other recession in the post-WWII era has the savings rate soared so high so fast; it will likely continue its upward march in the months to come as consumers attempt to rebuild the wealth they lost in the carnage of the housing and stock market collapses. While this is perfectly rational behavior for individual households, it may be detrimental to the economy as a whole according to Keynes' legendary "paradox of thrift". That is indeed a possibility and a concern, but one must also look ahead and consider what the shift to higher savings means for the economy once the recovery actually begins to materialize.

According to Professor Ed Leamer of UCLA, a set of dominoes typically falls into place when the economy enters and exits a recession. For example, declines in residential investment and consumer spending usually lead or coincide with recessions, but both generally rebound in advance of a recovery. Since we have plenty of reasons to believe that housing will not be a significant growth driver in the near term, thanks to high inventories, rising foreclosures and sliding prices, should consumer spending be held back by higher rates of household saving, two fundamental elements of Leamer's stylized recovery will be missing.

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