Roots of Crisis: Consumer Spending vs. Saving

The recent drop in the U.S. GDP (in 0.5% in 3rd and 6.2% in 4th quarters of 2008) is casually connected with the plunge in consumer spending. The government and Feds are trying to restore the financial system in order to rejuvenate credit and boost spending. Bouncing back of consumer spending is the vital part of the economy recovery; without it any stimulus package will not be able to put the economy back on track.

The only problem – it is impossible. Consumer spending CANNOT be restored at the pre-crisis level in any near future. On the next figure reproduced from from the Bureau of Economic Analysis website (U.S. Department of Commerce) it is easy to see that over years 90% of DPI (disposable personal income= personal income after taxes) were spent while remaining 10% were used for saving.




This situation started changing dramatically around 1993, when the share of saving started decreasing steadily. In 2007 savings reached astonishing 0.5% ($57.4bln out of $10,170.5bln) of disposable income. So, 99.5% of all money were well spent. No provisions on safety net; no retirement planning; just buying new houses, cars and home theaters.

Is it reasonable to expect that people will stick to this pattern in the current grueling economic situation? I don’t think so. It is much more logical to expect that they will return to a traditional 90/10 pattern, which means $1,000bln drop in spending. This "traditional" pattern will probably persist at least for some period of time required to restore consumer confidence and, thus, the associated drop in spending ($1,000bln annually) cannot be offset by any reasonable stimulus package.

In the next article we will consider why this regime change was overlooked by economists.