US savings rate soars to 14-year high

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It looks like American consumers are salting it away. The U.S. personal savings rate surged to a 14-year high 5.7 percent in April, the U.S. Commerce Department announced Monday, as consumers took advantage of tax cuts to increase savings and build safety cushions in the middle of the worst U.S. recession in more than 25 years.

The record, nearly $800 billion fiscal stimulus package was designed to increase spending, but so far Americans have used most of their increases in real disposable income, including a 1.1 percent increase in April, to increase savings. The personal savings rate totaled 4.5 percent in March.

Real consumer spending fell 0.1 percent, its second consecutive decline and eighth decline in the past 11 months.

Meanwhile, inflation remained modest in April, the Commerce Department said. Consumer prices increased just 0.1 percent. The core PCE index -- closely monitored by the U.S. Federal Reserve and which excludes the often-volatile food and energy component -- rose just 0.3 percent.

In addition, wages and salaries were unchanged in April, the first time wages didn't fall since September.

Economists surveyed by Bloomberg News had expected consumer spending to fall 0.1 percent and the core PCE index to rise 0.2 percent in April.

Credit Suisse Economist Jonathan Basile argued that those who expect an automatic return to 'consumer spending as usual' as soon as the recovery starts are in for a bit of a rude awakening.

"Consumers feel better about the economy but their spending has yet to catch up and it's unclear it will because income is under pressure," Basile told Bloomberg News Monday.

Permanent shift in consumer behavior?

Historically, consumer spending has accounted for about 60-65 percent of U.S. GDP, and it remains an open question as to whether consumer spending will snap back. Some economists point to 'green shoots' in housing and manufacturing as signs that a conventional economic recovery is taking hold, with a likely sustained increased in consumer spending. But the record April savings rate and high savings rate in previous months suggests a different dynamic. Economist Peter Dawson argues that the U.S. economy has changed in a fundamental way, and that the nation has entered a 'frugal consumer' era.

Economic Analysis: Wow -- a record high savings rate and inflation remains tame. The record high 5.7 percent April savings rate is more evidence that consumers are saving a massive amount of money (relatively) either to guard against future economic stress, or help rebuild depleted stock, housing, and savings nest eggs, or both. In normal times, the high savings rate would be a plus, particularly on the heels of more than five years of below-average savings by Americans: U.S. citizens do need to save more. However, as noted, the problem with a high savings rate now is that it takes that many more dollars out of an already constrained U.S. economy.

So it is a dilemma of sorts: Americans need to save more but the economy needs more dollars working in it -- and that only underscores why no one should fear a rise inflation. There aren't enough dollars working in the U.S. economy right now, the main reason a large fiscal stimulus package was passed. Further, another fiscal stimulus package may be needed down the road, if demand does not rebound in Q3 and Q4.
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