Arthur J. Villasanta – Fourth Estate Contributor
Washington, DC, United States (4E) – Americans are borrowing too much while saving too little and this worrisome mix seems to presage a forthcoming recession.
In previous recessions, the dwindling savings rate served as a recession warning and is doing so this time, said some economists. Savings have now fallen to historically low levels. Another sign of a coming crash: much of the economy’s growth is being driven by consumer spending fueled by massive borrowings and not by rising incomes.
This irony has puzzled even Federal Reserve Chairman Jerome Powell. Data shows that employers have added jobs every month for a record 7-1/2 years. And there are more job openings in the U.S. than there are people looking for work for the first time in at least 20 years. But salaries and wages remain low and stagnant while being eaten away by rising inflation.
Powell said it’s a “bit of puzzle” why wages haven’t risen faster, but he expressed optimism that American workers will see fatter paychecks as more go back to work.
The International Monetary Fund (IMF) published a working paper earlier this month looking at the U.S. personal savings rate since 1961. This savings rate is now around 2.5 percent, approaching the historic low of just above 2 percent that preceded the Great Recession of 2008.
Most U.S. recessions since 1961 have been preceded by a record low savings rate, with exceptions being made in 1973-75 and 1981-82. The savings rate preceding the latter of those two recessions, however, was still low relative to anything that had gone before.
“This issue has implications for the outlook for U.S. consumption and GDP growth, financial market stability, and external imbalances,” said Sam Ouliaris and Celine Rochon, authors of the IMF paper.
Ouliaris and Rochon also found no structural change in U.S. consumer behavior since the Great Recession. This means that after retrenching for a few years, Americans reverted to type: they borrowed more; exhausted savings and went on spending and spending.
Ouliaris and Rochon also discovered that savings are projected to fall further, and might fall to pre-Great Recession lows. This will happen if asset markets keep rising, increasing consumers’ net worth and encouraging them to borrow and spend more.
Article – All Rights Reserved.
Provided by FeedSyndicate