Americans’ spending, low savings are red flags for the economy

News that the economy did all right in 2017 landed on Feb. 2 with a benign thud, but behind that thud lurks a red flag.

For the duration of this economic expansion, consumer spending has been the dynamo driving growth in gross domestic product, or GDP. But now there are indications Americans are getting a little too dynamic.

Their actions are out of whack. For the past two years, spending has risen faster than disposable personal income, as has been pointed out by Jason Furman, a senior fellow at the Peterson Institute for International Economics and a former chairman of the White House Council of Economic Advisers under Barack Obama. For most of the recovery, the two measures remained relatively close. But as the labor market tightens, consumers are getting frisky even though hourly earnings aren’t growing any faster than prices right now.

This surfaces most starkly in the personal saving rate, which is the biggest red flag in the otherwise benign Feb. 2 report. According to Grant Thornton chief economist Diane Swonk, it’s been this high only one other time in history: when the popularity of home-equity lines of credit soared in the third quarter of 2005, at the peak of the housing boom.

Personal saving rate is what the Commerce Department calls the difference between Americans’ income and their spending on goods, services and taxes, measured as a share of disposable income. Typically, that money is invested in either the stock market or in residences.

It’s likely that consumer spending is outpacing earnings in part because people feel wealthier and more optimistic, thanks to a frothy stock market and, in some regions, fast-appreciating home values.

According to the Federal Reserve, Americans’ net worth is hitting all-time highs, even after adjusting for inflation. That wealth effect can’t explain everything. At last reading, household net worth wasn’t growing as fast as it had either in previous expansions or earlier in the current one.

Even more concerning, Swonk said, is increased reliance on borrowing and increased credit-card defaults. Low-income workers, in particular, aren’t able to save more despite the falling jobless rate.