Americans are spending a lot and not saving much. Economists aren’t too worried. Yet.
Americans are spending a lot and not saving much. Economists aren’t too worried. Yet.
July personal consumption expenditures data might’ve lined up with expectations, but there’s a trend in here that is unsustainable, and it’s about how much Americans are saving — or not.
Consumers’ savings rate dipped to its lowest rate in more than two years in July — 2.9% — and consumer spending increased, according to the Bureau of Economic Analysis. The spending part is a sign of a strong economy. But the data shows we’re continuing to buy stuff while not putting money away. You can see the problem here.
There are a few signs of a strong economy: wage growth, a lower inflation rate, as well as increased consumer spending. That last test consumers are passing with flying colors, said Paul Ashworth, chief U.S. economist at Capital Economics.
“We’re seeing them spending very, very strongly,” he said. “I mean, I might even use the description ‘like drunken sailors.'”
(Spending like drunken sailors is not exactly an economically stable way to operate.)
“Maybe it can’t be sustained, but it was never going to be sustained anyway,” Ashworth said.
Now that we’ve hit the lowest savings rate since June 2022, consumers have been relying on another way to bankroll their spending habits, said Paul Shea, an economics professor at Bates College: They’re starting to take on more debt.
“That’s the only way you can have spending holding up as well as it is with the economy starting to slow down. But it’s still relatively early in that process,” he said.
Shea said it’s not that saving rates are frighteningly low, it’s just that they’re coming down from when they were really high early in the pandemic, when people had money to spend and nothing to spend it on. Now things are different.
“The average household is, in a way, normalizing. They’re starting to move towards more normal levels of debt,” he said.
That may sound like a slippery slope, but then there’s that other thing that comes with a strong economy: wages that outpace the rate of inflation, said economics professor Matías Vernengo with Bucknell University.
“I think that they’re spending more and saving less because their wages are going up,” he said. “So the spending power of consumers has increased.”
All of this combined has Vernengo ready to quell any concerns about an economic downturn: “The economy is still doing fine, and we’re not going to have get a recession, thank God. And inflation is coming down, so it’s a sweet spot to be in,” he said.
But there are other numbers coming that might tell a different story. Next week, we’ll get employment data, and if the jobs slowdown continues, that might make today’s optimistic economists sing a different tune.
Stories You Might Like
There’s a lot happening in the world. Through it all, Marketplace is here for you.
You rely on Marketplace to break down the world’s events and tell you how it affects you in a fact-based, approachable way. We rely on your financial support to keep making that possible.
Your donation today powers the independent journalism that you rely on. For just $5/month, you can help sustain Marketplace so we can keep reporting on the things that matter to you.
