As U.S. Households Save, Economy Sputters
"Delay and pray" is not a viable fix for the household sector's woes. Indeed, it may only be making things worse.
In a marked shift from their borrow-and-spend behavior during the boom, U.S. households are now by and large prioritizing saving and debt reduction. On Monday, the Commerce Department is to release July figures likely to show the personal saving rate, or proportion of after-tax monthly income unspent, in the 5% to 5.5% range it has maintained for roughly the past 18 months.
Though that remains below the 7% to 8% average of prior decades, this recent upswing is a welcome turn from the near-zero saving rates of years past. In many cases, it is needed as collapsing asset prices, namely for housing, have left many households saddled with more debt than equity, and many more at risk of joining them should prices continue to fall.
Trouble is, this newfound thriftiness and debt-shedding behavior translates into less consumer spending, which makes recessions more likely. The risk is a vicious downward spiral where recessions, which can induce deflation, make the size of households' existing debts even bigger and more difficult to pay down, deepening and extending the period of economic malaise.
That is why the Federal Reserve has taken such extraordinary steps. It has pushed interest rates to historic lows and turned to purchases of government bonds to try and prop up asset prices and lessen the cost of servicing some debts. It is an effort to delay, in other words, the deleveraging process in the hope growth will recover quickly enough to keep prices from falling further.
But the Fed has only blunt tools at its disposal, and they aren't much use at fighting gravity. Its efforts have done little to forestall home-price declines. And while its latest bond-buying program, which ended in June, did boost stocks, it also juiced commodities, which undermined spending and hurt growth. In the meantime, years of ultralow interest rates have eroded both the income and security of savers and pensioners, which is a further impediment to recovery.
Much more effective would be targeted debt-reduction programs, but these are outside the scope of the Fed. By trying to do Washington's bidding, the central bank risks a bad deal for everyone.
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