Consumers ended 2017 by accelerating spending faster than their incomes, squeezing their savings rate to its lowest levels since the eve of the Great Recession.
The U.S. Commerce Department reported Monday that personal savings were an annualized $351.6 billion in December, the smallest since December 2007, the month the recession began. The 2.4% savings rate in December was the smallest since it fell to 2.3% in September 2005.
Disposable personal income was $14.6 trillion, annualized, and was up 0.3% from November after adjusting for seasonal variations. Meanwhile, personal consumption expenditures rose 0.4% to $13.7 trillion.
Some economists have worried that this pattern of consumer spending increasing at a faster rate than income over the past two years indicates a weakness in the economy. While jobs have been increasing, wages have still lagged and many families are still struggling to make ends meet.
CUNA economist Jordan van Rijn said savings rates fell in the five to seven years after the start of the Great Recession “when banks weren’t lending.”
The longer term trend since 1975 has been a declining U.S. savings rate, and wages are not the only reason, he said.
“This likely reflects numerous factors, including cultural changes away from an emphasis on saving, better underwriting and loan processing technology, more use of credit bureaus, lower interest rates, and easier access to cheap credit,” van Rijn said.
“The huge increase in student loan debt might also be an important factor, as young people today find it more difficult to save.”
A significant difference between now and 2007 is the absence of an asset bubble, like the housing market 10 years ago. Net worth is rising slowly, which could indicate that it is more sustainable.
“In fact, median net worth has not even caught up to what it was back in 1998,” he said. “This indicates that we are probably not in a bubble—at least not a big one—and it is likely net worth will continue to rise steadily for some time.”
Earlier this month, CUNA raised its forecast for economic growth in 2018 from 2.5% to 2.6%, citing low unemployment, high consumer confidence and the enactment of federal tax cuts for corporations and individuals.
The Commerce Department report also showed that for the year as a whole, total personal income rose 3.1%, its biggest gain since rising 5% in 2015. Other highlights for the year included:
- Disposable personal income rising 2.9%, its biggest increase since rising 4.5% in 2015.
- However, adjusted for inflation, real disposable personal income rose just 1.2%, the worst performance since a 1% gain in 2010 and a 1.4% decline in 2013.
- The 4.5% increase in personal consumption expenditures was the largest since rising 4.8% in 2011.
- The personal savings level of $485.8 billion was the smallest since it fell to $309.8 billion in 2007.
