Americans Still Spending More, Deferring Savings

It’s no secret that during the boom years the personal savings rate of Americans gradually declined until at the peak it actually was negative by some computations. The crisis of 2008 was supposed to change that. Americans, rattled by the decline in the values of their homes and portfolios, became more frugal. They were cutting debt, eliminating the frivolous and non-necessary purchases, and entering an age of new austerity.

Now so fast. As I’ve been documenting in Retirement Watch, the economic boom in the second half of 2011 was the result of reduced savings and greater credit card use by households. I don’t think it’s sustainable, just as it wasn’t during the boom period. The main difference between then and now is that consumers are borrowing through high interest credit cards instead of lower-interest home equity loans.

After a few years of relative frugality, the amount of money that Americans are saving has fallen back to its lowest level since December 2007 when the recession began. The personal saving rate dipped in November to 3.5 percent, down from 5.1 percent a year earlier, according to the U.S. Commerce Department.

Charles Evans, President of the Chicago Federal Reserve, is among those sounding a warning about the development.

American households “have been spending recently in a way that did not seem in line with income growth. So somehow they’ve been doing that through perhaps additional credit card usage,” Chicago Federal Reserve President Charles Evans said on Friday.

“If they saw future income and employment increasing strongly then that would be reasonable. But I don’t see that. So I’ve been puzzled by this,” he said.