Americans are saving less cash
Expenses are rising, income is stagnant
Joe Joyce, of Whitefish Bay, Wis., used to stash a few hundred dollars in the bank each month, meticulously shoring up his family’s emergency savings fund.
But for the past 18 months or so, with his paycheck stagnant and his expenses rising, he has been drawing a few hundred dollars monthly from the account, slowly depleting it. He recently dropped his cable service and health club membership and soon, he says, he’ll have to start cutting back on indulgences such as eating out once a week. “It’s going to have to happen,” says Joyce, 52.
As average wage hikes across the U.S. continue to lag increases in spending, Americans are saving less or dipping into bank accounts to fuel their outlays. Some economists say that’s an unsustainable dynamic that portends a downturn in consumer spending, which has been driving economic growth.
In the second quarter, households saved 3.8% of their disposable income, down from an average of about 5% last year and 6% in 2015, according to revised figures released by the Bureau of Economic Analysis. In 2007, before the recession, Americans were socking away about 3% of their after-tax income. But during and after the downturn, cautious consumers sharply scaled back their borrowing and saved more.
But over the past couple of years, household spending has begun to outpace income gains. From the second quarter of 2015 to the second quarter of
“If you’re relying on your savings to finance your spending, at some point you’re going to run dry.” Gregory Daco, chief U.S. economist of Oxford Economics
2017, personal disposable income increased an average 2.8% a year while consumer outlays rose about 4%, BEA figures show. The gap between income and spending is pulled from savings.
“If you’re relying on your savings to finance your spending, at some point you’re going to run dry,” says Gregory Daco, chief U.S. economist of Oxford Economics. As a result, he says, “I think we’re going to see more subdued consumer spending ” as soon as the current quarter.
Other economists, however, believe the pullback in savings indicates that, eight years after the Great Recession ended, Americans are confident enough to save less and spend more. And, they predict, the drawdown on savings will end soon because pay increases are poised to accelerate as the 4.3% unemployment rate forces employers to bid up to attract workers.
Although the average hourly earnings reported by the Labor Department each month has been rising about 2.5% annually, that doesn’t count non-wage compensation. Average weekly pay — including bonuses, stock options and certain commissions — fell 1.5% last year, according to Labor’s quarterly census of employment and wages.
Joyce, director for a company that makes bone-density measuring technology, hasn’t gotten a raise or bump in his bonus in three years. Meanwhile, expenses increased. “When everything else is going up and your paycheck isn’t, it’s not even keeping pace with the cost of living,” he says.
Daco argues that Americans can’t keep siphoning from their savings and that wage growth will pick up only gradually. But Tom Porcelli, chief U.S. economist at RBC Capital Markets, largely sees the reduced savings as a sign of consumer confidence.
“It is a good thing if it isn’t taken to the extreme,” he says. “You don’t necessarily get a sense consumers are throwing caution to the wind.”