Savings Bounce May Be Upside To Downturn

There may be a silver lining in the black cloud hanging over our economy: America's abysmal personal savings rate has taken a turn for the better.

Building on a steady increase in the personal savings rate — 2008's 1.8% increase, a 4.2% increase in 2009's first quarter and a 5.6% rise in April — the Commerce Department has reported that the U.S. personal savings rate climbed 6.9% in May.

While still early, this could signal a dramatic return to a more normal personal savings rate. It could also have profound repercussions at home and abroad as both economies recalibrate away from hyper-levered American consumers.

The Bureau of Economic Analysis calculates the savings rate to 1952. The first four decades of this 57-year period are remarkably stable: 8.1% in the 1950s, 8.3% in the '60s, 9.6% in the '70s and 9.1% in the '80s.

Then came the 1990s, cutting the percentage almost in half — to 5.2%. From 2000, the figure fell further — to 1.6% — and now this decade's savings rate is just a sixth of what it was two decades ago.

Interestingly, this low savings rate dramatically rebounded last year when, in the midst of a recession, it tripled from 2007's 0.6%. This reversed an anemically low rate that has prevailed since the 1990s.

Looking at the period from 1993 through 2007, the savings rate averaged 2.8%. That period, following the mild recession of 1990 and encompassing the equally mild one of 2001, marked the longest period of peacetime prosperity in American history.

It also encompasses the baby boom generation entering its peak earning years. Baby boomers are really the "entitlement generation." Never having lived without the government's social safety net, they have seen it only increase during their lifetime.

The overlap of the entitlement generation's peak earnings and an unprecedented period of economic expansion make it hardly surprising that a dramatic change in the attitude toward saving would coincide. It would be more surprising if it had not.

Comparatively, this period was the economic photo negative of the Depression (1929-45) — a tremendous break from the boom-and-bust economic cycles America has always encountered.

The economy seemed "solved." An almost economic invincibility appeared — one that even when interrupted was only mildly and momentarily so. At the same time perpetual prosperity became seemingly more assured, the consequences of personal economic difficulties were ever more reduced by the federal safety net.

There was less and less apparent reason to forestall consumption (which is what savings is) and more and more ability not to. It became increasingly easy to borrow against the expectation of increasing assets. Certainly the 1993-2007 period was marked by financial innovation that allowed greater leveraging throughout American society, but what really changed was not so much the tools but the wielder of them.

The result was that throughout American society — individuals, families, companies — all became highly leveraged. U.S. consumers drove not just our economy but the world's. Our need for savings shifted abroad, and, with an exchange of their savings for our debt, we facilitated the creation of export-driven economies.

Of course, by being highly leveraged to economic growth, it was highly susceptible to a decrease in that growth. Like a high-performance race car, the system had limited durability off its closed track.

One year, one quarter and two months may not be a trend. However, it is very clear that the increase in personal savings has been due to the economic downturn. The question then becomes: Has the downturn been severe and prolonged enough to alter the prevailing anti-savings mind-set and cause a reversion to higher and historical personal savings rates?

If so, then there will be a fundamental shift in the nation's and world's economic growth engine. Increased savings can only be accommodated by decreased consumer demand. Deleveraging means the economy won't return to where it was — its growth curve will have shifted downward — and it will only regain its earlier levels over time and at a more moderate pace. This will reverberate not only through our economy, but also with those that had serviced its leveraged consumption.

Such a change would still be a plus, despite the dislocations needed to affect it. More importantly, a change in the entitlement generation's expectations is probably the necessary precursor to changing the entitlement programs that threaten the economy.

It is far more likely that the case can be made to deleverage these programs, if the people themselves have accepted the need to do so in their own finances. If the entitlement generation must relinquish the illusion of economic immunity, perhaps it will be willing to accept that the government itself must do so as well.