Savings Rate Rises to 4% in May as Income Gains Outpace Spending

Savings Rate Rises to 4% in May as Income Gains Outpace Spending
Savings Rate Rises to 4% in May as Income Gains Outpace Spending

The U.S. savings rate's rise to a 4% annual rate in May, an eight-month high, is something of a mixed economic blessing.

On the one hand, a high U.S. savings rate is beneficial for the nation in the long-term, as it will increase the supply of capital available for investment -- and it means Americans are working to rebuild their nest eggs.

On the other hand, in the short-term, saving takes dollars away from consumption, which will make it harder for the U.S. economy to grow at an adequate rate. The U.S. savings rate was 3.8% in April.

Overall, the income and spending picture was mixed in May. In nominal terms (not adjusted for inflation), incomes increased 0.4% in May while spending increased 0.2%. The consensus of economists surveyed by Bloomberg had been that incomes would rise 0.5% and spending, 0.2%.

Little to Fear From Inflation

Another standout statistic in the Commerce Department's personal income and outlays report concerned consumer prices, which were unchanged in May, according to the personal consumption expenditures price index. Prices have risen 1.9% over the past 12 months.

The core consumer price index -- which excludes the often-volatile food and energy components -- increased 0.2% in May and has risen 1.3% in the past year.

From an investor standpoint, the May report shows the economy in a modestly positive light. Personal income and consumer spending both rose, two things that historically walk hand in hand with increases corporate revenue and earnings. Higher real incomes obviously enable Americans to increase spending without racking up credit card debt, as well as enabling them to save. Even so, incomes will have to continue to increase in the quarters ahead if the economic recovery is to be sustained.

Meanwhile, the lack of inflation is good news for investors and policy-makers, alike. The mild 1.3% rise in the core PCE price index over the past year gives the Federal Reserve more leeway to maintain its accommodating monetary policy for a longer period of time. Easier access to capital will give the economy a better chance to grow at a faster rate, which in turn should lead to more hiring and a reduction in the nation's high unemployment rate, currently 9.7%.