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U.s. Savings Rate At Highest Point In 15 Years

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http://www.nytimes.com/2009/06/27/business...ml?ref=business

Tax cuts from the stimulus package and increases on Social Security checks lifted personal incomes sharply in May, the government reported on Friday, but it appeared that many people were putting that money away instead of spending it.

Although personal spending increased slightly last month, the saving rate climbed to its highest level in 15 years as consumers tried to build a buffer against the threat of job losses and more economic hardships.

The personal saving rate, which dipped below zero during the housing boom as Americans tapped home-equity loans and other easy lines of credit, rose to 6.9 percent in May, the Commerce Department reported. That was its highest point since December 1993.

On Wall Street, investors saw little reason to cheer the increases in incomes or spending, and stocks fell moderately in late-morning trading, unraveling some of the gains from a day earlier. Stocks are poised to close lower for a second week, offering more fodder to bearish investors who believe that this spring’s stock rally has largely run its course.

At 11 a.m., the Dow Jones industrial average was down 66 points or 0.8 percent while the wider Standard & Poor’s 500-stock index was 0.7 percent lower. Smaller losses in technology stocks helped to stem losses on the Nasdaq index, which was off 0.3 percent.

As personal savings return to their historically normal levels, the increase triggers what economists call the “paradox of thrift.â€

Although saving money helps individuals repair their finances and pay debts, a sharp rise in overall personal saving can actually deepen a recession and hurt the people who are saving more. As people save money, fewer dollars circulate through shopping malls, Main Street businesses, large employers and back to workers through their paychecks, pulling the economy lower.

Economists say the recent spike in personal saving was likely to fall back slightly as the effects of government stimulus fade, but they have said that Americans are becoming thriftier and are not likely to return to the spendthrift patterns that fueled much of the growth of the last nine years.

Steep declines in home values and individual stock portfolios have erased trillions of dollars in household wealth. Economist Joshua Shapiro of MFR noted that he was “clearly seeing signs of households altering their behavior in the face of large capital losses in investment and real estate portfolios, an abysmal labor market, and tight credit.â€

Still, while consumer spending did not increase last month as rapidly as savings, it did post a small increase. Personal consumption rose 0.3 percent in May after falling or remaining flat in the two previous months.

A 1.4 percent rise in personal incomes was an indication that money from the government’s $787 stimulus program was beginning to flow through the American economy.

“That’s the whole point — put money back in the pockets of consumers and households and they’ve accomplished that,†Nariman Behravesh, chief economist at IHS Global Insight, said. “The good news is, it’s working. The question is, how much of this is a blip?â€

And how much of it depends on the largesse of the government? Although disposable personal income rose at a seasonally adjusted rate of $178.1 billion in May, the Commerce Department also reported that private wages and salaries decreased $12.4 billion.

“The good news is, it’s working. The question is, how much of this is a blip?â€

If it's a blip, HOW CAN IT BE WORKING???? If it's working you have sustainability, if it's a blip you've wasted your time. Where do they get these experts from?

So American is saving. Too little too late.

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http://www.nytimes.com/2009/06/27/business...ml?ref=business

Investors are nervous about the savings rate outpacing spending.

Shares lost ground early Friday after the Commerce Department said personal spending, incomes and savings all rose in May.

Spending rose by a modest 0.3 percent, but what was be worrisome for investors was a 6.9 percent jump in the savings rate to 6.9 percent, the highest level since December 1993

After about an hour of trading, the Dow Jones industrial average was down 50 points, or 0.63 percent. The Standard & Poor’s 500-stock index fell 0.54 percent. The Nasdaq composite index was a few points lower.

The surge in savings suggests that consumers are being shrewd with their money. But it is not great for the overall economy in the short-term.

Phil Orlando, chief equity market strategist at Federated Investors, said he expected the savings rate to eventually hit 10 percent. The savings rate had been 5.6 percent in April, and annual savings rates were below 1 percent from 2005 through 2007.

“If people ramp up savings that aggressively, that is going to result in less G.D.P. recovery than ordinarily would be the case,†Mr. Orlando said.

Gross domestic product dropped at an annual rate of 5.5 percent in the first quarter, the government reported earlier this week. As the second half of 2009 draws to a close, investors are growing more anxious about whether the economy can bounce back later this year.

What a system we have.

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As personal savings return to their historically normal levels, the increase triggers what economists call the “paradox of thrift.â€

Although saving money helps individuals repair their finances and pay debts, a sharp rise in overall personal saving can actually deepen a recession and hurt the people who are saving more. As people save money, fewer dollars circulate through shopping malls, Main Street businesses, large employers and back to workers through their paychecks, pulling the economy lower.

Correction - it may hurt those who didn't save more. It's basically game theory - if people are going to save, it is best to get saving first!

In the long run, people living within their means will be much more sustainable though, even if it hurts the economy in the short/medium term.

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Correction - it may hurt those who didn't save more. It's basically game theory - if people are going to save, it is best to get saving first!

In the long run, people living within their means will be much more sustainable though, even if it hurts the economy in the short/medium term.

Indeed. That's what we've been advocating on here for a few years now. When I first trawled through the site in 2005 there was plenty of advice that saving and paying down debt was a sure fine winner - even though there was one hell of a boom going on.

For every follower of this wisdom, there'll be some wonderful spending opportunities over the next few years.

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