‘Tis the Season to be…Thrifty

‘Tis the Season to be…Thrifty

Consumer spending has only now begun to tick above the levels observed last year when the financial crisis and recession really snowballed. However, recent data from the Federal Reserve’s flow of funds report point to a consumer still rattled by the housing market’s implosion, stock portfolio losses and struggling labor market. During 2009Q3 alone net savings (saving less borrowing) totaled roughly $800 billion, suggesting households are still aggressively deleveraging and restoring nest eggs.

Although the savings rate hasn’t skyrocketed to historically high levels, a key determinant of the pace of economic recovery going forward is the extent to which consumers stick with this recent display of frugality. Savings rates aren’t likely to be in the same league as those observed during and after the Great Depression; nonetheless, the recent shocks to the labor market, stock valuations and housing prices will probably keep a lid on consumer spending over the near term. Longer term, memories will fade somewhat, but the financial crisis may leave a lasting impression on consumers to the point that growth in spending remains more closely tethered to gains in income. Only time will tell.

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