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Economic Forecasts

Savings Rate: How Much Higher?

An increase in the U.S. savings rate is good news over the long term. But if the steep incline continues, it could jeopardize economic recovery.

The savings rate isn’t likely to shoot much higher in the coming months. There’ll be no quick return to the 9% to 12% level common during the 1970s and early 1980s, which would have a devastating effect on consumer spending. Every percentage point increase in the savings rate knocks about $115 billion off consumer spending—by far the biggest driver of the economy and the biggest question mark about the strength of the recovery.

A more gradual rise will simply dampen consumer spending growth, not stifle it. Look for the recent steep incline in the savings rate to flatten out, settling between 7% and 10% over the course of the next few years. A decades-long downtrend hit bottom at 1.2% during the first quarter of last year, before rising a remarkable four percentage points to 5.2% in the second quarter of this year.

A surging stock market during the 1990s followed by a boom in housing prices starting around 2002 encouraged many households to spend just about every dollar of annual income—and then some. Not only did the savings rate plunge, outstanding credit soared. But recent stock market losses and lower housing prices dealt a severe blow to net worth. Combined with persistent concerns about job security, those factors should keep Americans from resuming their profligate ways.

Meanwhile, increased job growth next year should buoy consumer spending, helping to offset the negative impact of consumers socking more money in the bank. By early 2010, businesses should begin hiring again, accounting for modest net job growth. While it won’t be enough to offset growth in the labor force—causing the unemployment rate to continue to climb—the increase in the number of Americans earning paychecks is likely to allow consumer spending to tick somewhat higher.

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