Here’s a potential trouble spot for the U.S. economy: Americans might be spending beyond their means, dipping into savings to pay for their latest purchases.
Newly revised government figures show Americans continue to boost spending about 2.5% a year even though growth in after-tax income has slowed to around 1%. Figures are adjusted for inflation.
Gregory Daco, chief U.S. economist at Oxford Economics, said it appears Americans have been able to keep on spending by reducing their savings.
During most of the recovery, the U.S. savings rate ranged from 4% to 6%. Yet the U.S. savings rate began to slide at the start of 2016, and it fell to a nearly 10-year low of 3.2% earlier this year.
In June, the savings rate equaled 3.8%.
The low savings rate and big gap in income and spending come as quite a surprise. Before the government revisions, income growth was supposedly growing at a 2% to 2.5% annual pace. And the savings rate was listed above 5%. Everything seemed all right.
The recent changes in the government’s calculations, however, simply households aren’t doing nearly as well as previously believed.
Are Americans relying more on credit cards, home-equity loans or stock sales? It doesn’t appear so.
Consumers have recently cut back on credit, Daco noted — notably for auto loans. Home prices have only risen gradually, he pointed out, and the booming stock market tends to benefit wealthier Americans who don’t spend most of their equity gains.
Unless incomes increase faster, Americans probably can’t sustain their current rate of spending. If so, the economy could slow again in the near future.
“Savings dips tend not to be sustainable,” Daco wrote in a new report.
Courtesy of Market Watch and credited to Jeffry Bartash.
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