Seth Fiegerman at MainStreet.com wonders if the U.S. is overdosing on savings. “Americans are getting better with their money, but in the process, we may be undermining the country’s financial recovery,” he wrote yesterday.

The inspiration for taking a fresh look at the subject is this week’s news from the Bureau of Economic Analysis that the personal savings rate was a relatively high 6.4% in June. That may not sound like much, but it’s far above levels posted as recently as 2007, when Americans were socking away less than 2% of their personal income (see chart below). At the time, the extreme preference for consumption prompted worries that America would be overly reliant on foreign financing for the long run (a fear that’s now widely accepted as fact and one that’s not going to fade away soon). Explaining the country’s spendthrift habit in 2007 was challenging in economic terms, leaving one study to label the trend a “puzzle.”

But the tide has turned after the Great Recession and Americans have recently been saving the highest share of income in about 20 years, as the chart above shows. Is that good news? Perhaps, although it comes with caveats. As Fiegerman points out, the jump in the savings rate has prompted worries that the trend threatens the growth outlook for the U.S. economy, which is heavily dependent on consumer spending. He framed the challenge this way:

So now we’re faced with an odd dilemma: Should we abandon our good spending practices to help the economy? It’s a matter of what’s more important – your own financial well-being or America’s?

The reality is that individuals don’t make spending decisions based on what’s best for the country—shocking, isn’t it? No one runs out to buy a TV or car because they think they’re acting in the national interest. For most folks, consumption fulfills a personal need. A few years back, when disposable income levels were unusually high, or so it appeared, consumers were easily convinced that a trip to the mall was a reasonable choice. But that’s harder to rationalize these days.
The reason is because need (or preference) alone isn’t the only variable in the spending equation. Another shocking disclosure: the trend in income influences spending habits too. In fact, it probably dominates consumption habits in the long run. But on that score there’s reason to wonder if the savings rate is set to stay high or even rise further.
As discussed earlier this week, the latest income and spending update from the government reported that both were unchanged in June vs. May—the “new normal,” as some are calling it. A robust recovery in the labor market could intervene for the better, but so far the evidence in favor of salvation from job creation is unimpressive.
The other key factor, albeit a less direct one, that influences consumer spending is the housing market. For most Americans, a house represents the single-biggest financial transaction and so the price trend in residential real estate casts a long shadow on personal spending decisions. No wonder, then, that consumers are saving more in the wake of an extraordinarily steep decline in housing prices. That’s a reversal of the long bull market in housing that ended in 2007. It’s hardly surprising to learn that consumption was rising while residential real estate prices were climbing at a rapid rate. A relatively low unemployment rate bolstered the trend.
But that was then. Yes, the trend today is better than it was a year ago. For a time last year, housing prices overall in the U.S. were falling by nearly 20% on an annual basis, according to S&P/Case-Shiller Home Price Indices. Today, home prices are rising modestly again, albeit after a period of hefty losses. The change is encouraging if not yet convincing. The latest report for the national S&P/Case-Shiller Home Price Index indicates a roughly 5% rise in prices for the 12 months through this past May, as the second chart below shows.

Given the magnitude of the previous losses in housing, it’ll take several years of recovery in residential real estate to be a net plus in terms of convincing consumers to spend more. There’s still a glut of homes for sale, courtesy of the crushing losses in residential real estate in recent years. “There’s too much supply for the demand that’s there,” Michael Feder, chief executive of the housing market research firm Radar Logic, told AP this week. “That’s not a dynamic in which values go up.”
That leaves the job market as the primary catalyst (for good or ill) for influencing consumption habits. By that standard, expecting the personal savings rate to remain elevated looks like a safe bet for the foreseeable future.