NCPA - National Center for Policy Analysis


January 7, 2009

As layoffs and store closures grip the nation, some families hope their newfound frugality will see them through the economic downturn.  But this same thriftiness is also a major reason the downturn may not soon end.  Americans, fresh off a decades-long buying spree, are finally saving more and spending less -- just as the economy needs their dollars the most.  In a recession, increased saving -- or its flip side, decreased spending -- can exacerbate the economy's woes. It's what economists call the "paradox of thrift."  Consider:

  • U.S. household debt, which has been growing steadily since the Federal Reserve began tracking it in 1952, declined for the first time in the third quarter of 2008.
  • In the same quarter, U.S. consumer spending growth declined for the first time in 17 years.
  • That has resulted in a rise in the personal saving rate, which the government calculates as the difference between earnings and expenditures.

In recent years, as Americans spent more than they earned, the personal saving rate dipped below zero. Economists now expect the rate to rebound to 3 percent to 5 percent, or even higher, in 2009, among the sharpest reversals since World War II.

As savings increase, economists say, spending is likely to contract further. They expect gross domestic product to decline at an annualized rate of at least 5 percent in the fourth quarter, the biggest drop in a quarter-century.

Source: Kelly Evans, "Hard-Hit Families Finally Start Saving, Aggravating Nation's Economic Woes," Wall Street Journal, January 6, 2009.

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