How Can the Economy Grow If Consumers Become Savers?

The consumer savings rate jumped to 6.4% in June,

the highest it has been in a year, and far above prerecession levels. But this surge of responsible behavior on the part of Americans isn't exactly good news. Sure, it's a natural response to being unable to borrow money and to watching 401(k) accounts fall in value after a decade of trying to do what the experts say you should -- save for retirement.

With companies cutting back on salaries, people are realizing that there's only one piggy bank they can rely on: their own (dwindling) income. But with 70% of GDP growth coming from consumer spending, this high savings rate is bad news. It looks like it's time to change the structure of the U.S. economy, and one possible source of the change is corporate cash.

The current high savings rate could mean that consumers are feeling uncertain about the future. But that explanation holds no water -- after all, the only things that are ever certain in life -- regardless of who the president is -- are death and taxes.

Ominous Signs

The new dimension now is that many government spending incentives -- such as cash for appliances, cash for clunkers and homebuyer tax credits -- have expired. In addition, the U.S. Census has largely finished its data collection, which means the hundreds of thousands of temporary jobs that it provided are gone as well.

Economic growth is certainly showing signs of slowing down, as the modest 2.4% second-quarter GDP growth suggests. And without government incentives to keep consumers spending, the savings rate is likely to stay high: Consumers are probably going to be cutting back even more as those who are still employed are forced to take pay cuts.

For example, The New York Times reports that a Mott's apple juice and sauce plant near Rochester, N.Y., is asking 300 unionized workers -- now on strike -- to accept a pay cut of $1.50 a hour along with a drop in Mott's 401(k) contributions and "higher employee contributions to health insurance." At a paper mill in Madawaska, Maine, 460 union workers agreed to an 8.5% pay cut in May "to help keep their paper mill in business," according to the Times.

The New Engine of Growth: Corporate Fear

Will corporate spending pick up the slack and help the economy grow when skittish consumers become heavier savers? Apparently, no. According to the The Washington Post, orders for manufactured goods dropped 1.2% to $406.4 billion in June after declining 1.8% in May.

Corporations have also gone on a spending strike, and they're piling up cash: $1.84 trillion worth so far, to be specific. Convincing them to get that money working could mean a real boost to GDP growth -- but what could get companies to start spending it? In a word: fear. But not just any fear -- what I mean is fear of falling behind their competitors.

Companies will start to feel that fear when their earnings growth slows down after they have reaped as much benefit as they can from cost-cutting. At that point, companies will need to find their profit growth in higher sales, and the fastest way for big companies to increase sales is to acquire other, faster-growing companies that have big revenues.

Creating a Feeding Frenzy

If your leading competitor makes an acquisition, you're going to feel that fear of falling behind. One way to alleviate that fear will be to make an acquisition of your own. That will leave all the other players in your industry suffering from that same fear, creating an acquisition feeding frenzy.

Sure, I'd like to see another decade of technology-led growth, as I've written in previous articles on DailyFinance. But as long as consumers and businesses are on a spending strike, we're not going to see our economy grow much. Our best hope of ending that is companies flush with cash start feeling the fear of falling behind their competitors.

This could be what Keynes meant when he was talking about "animal spirits" moving the economy.