Americans are saving more, even though the average income is inching up. Image: Flickr / krasi / CC-BY

Each month, the federal government releases a report on consumer saving and spending rates. These two rates are seen as indicators of consumer sentiment and economic growth. The January spending report is also being seen as a referendum on the payroll tax cut.

January personal income

The United States Commerce Department’s monthly report on personal income and spending contained a few surprises. Overall, personal income increased about 1 percent to $133.2 billion. Overall, that equals about $428 per person in increased spending power in the United States. Increased costs of fuel, food and housing mean that disposable income increased by less — about 0.7 percent. Some figures put the increase in “real” disposable income at even less — about 0.4 percent.

Smaller increases in personal spending

While personal income did go up during the month of January, personal spending did not go up at the same rate. Overall consumer spending in the United States went up by about 0.2 percent. The remaining increase in personal income was put in savings. As a whole, Americans saved about $677.1 billion in January of 2011. This puts the personal savings rate at more than the increase in personal income. This higher savings rate indicates that consumers are being much more cautious with their money. The decreased tax burden does not necessarily translate to spending, as the taxes are showing up in small amounts in paychecks, rather than as a lump-sum payment.

What the numbers mean

Economists put heavy stock in the spending and saving rates reported month-by-month. Rarely are the estimations of monthly income, savings and spending economists offer entirely correct. The real importance in these numbers could be the changing attitude of the American consumer. For several years before the economic collapse, Americans were spending more money than they had. The increased savings rate technically will slow down overall economic recovery because it means less money is going into the economy. For long-term recovery, however, a high savings rate means that individuals have a reduced need for credit and high-risk financial products. This reduced demand means the U.S. financial system could develop a more stable base and weather future downturns more easily.

Sources

CNN Money
Census.gov
Bloomberg

The Fed's record-low interest rate policy is boosting profits at bailed out banks at the expense of savers, investors, pensions and endowments. Thinkstock photo.

U.S. consumers are cutting debt and trying to save more money. The Federal Reserve, in an effort to keep the economy from a double-dip recession, is keeping the benchmark interest rate artificially low. Record-low interest rates are fattening bank bottom lines. The low interest rate has created a wide disparity between what financial institutions can collect from borrowers and what they have to pay depositors for their money. Some analysts are saying that while Fed monetary policies shore up the banks it bailed out with billions, they are an “invisible tax” on savers, investors, pensions and endowments.

Little reward for saving money

U.S. banks are paying savers the lowest average rates on record. A Bloomberg story on a report from Market Rate Insight said that the national average rate paid on interest for checking, savings, money market and certificates of deposit in July was 0.99 percent. The interest rate index produced by Market Rates measures rates and bonuses paid by 1,300 commercial banks and credit unions of all sizes around the U.S. The report also tracked savings rate fluctuations between Jan. 2004 and July 2010. When the national unemployment rate goes up, savings rates go down. The report concludes that when the unemployment rate goes down, interest rates on savings will go up.

Banks set up roadblocks to debt reduction

Fed monetary policy that is holding the interest rate at near zero, some believe, is rewarding banks and penalizing the average citizen. People who want to reduce debt and save more seem to have the deck stacked against them. Larry Doyle at Daily Markets writes that miniscule interest rates are squeezing people who live on fixed incomes. Savings accounts generate a negligible returns. Meanwhile, it costs credit card issuing banks next to nothing to borrow money while they continue to raise interest rates on consumer credit.

Low interest rates an invisible tax

The Fed’s interest rate policy may be causing more economic problems than it’s solving, according to Gretchen Morgenson at the New York Times. Todd E. Petzel of Offit Capital Advisors told Morgenson that the Fed’s interest rate policy is an “invisible tax” that costs savers and investors about $350 billion a year. He got that figure by starting with about $14 trillion in debt issued by the Treasury at an interest rate near zero. Rates have averaged 3 percent over time. That makes current rates too low by 2.5 points. On $14 trillion, 2.5 percent adds up to $350 billion a year in lost income to savers, investors. pensions and endowments. The money lost is more than 2 percent of gross domestic product and almost 3 percent of disposable personal income.

Retail sales indicate people will spend at the pump and the dealership, but not much elsewhere. Image from Wikimedia Commons.

The U.S. Census Bureau has just released its monthly report on retail sales activity. The Census Bureau found that retail sales for July grew about 0.4 percent from June and had grown 5.5 percent since June of 2009. The increase was less than projected. Economic indicators are pointing toward a slower recovery. Consumer prices also rebounded slightly after several months of slight decline. Consumer prices are being watched closely, as increasing prices and decreasing incomes and assets are signs of deflation.

Retail sales get a slight bump

Retail sales for July saw a slight increase. The U.S. Census Bureau reports that retail sales as a whole increased by 0.4 percent for July, but that figure can be somewhat misleading. Discretionary retail spending, for goods such as furniture or electronics, fell 0.42 percent between June and July. Discretionary spending, according to the Christian Science Monitor, rose 2.77 percent from a year ago. Retail sales had fallen the previous two months, as May retail sales were down 0.3 percent from April, and June sales slid a further 1.0 percent, according to the Wall Street Journal.

Modest gains helped by auto sales

With car companies beginning to make serious gains, such as General Motors and Ford returning to profitability, the sale of cars helped retail sales figures. According to Bloomberg, the bulk of the increase was from people buying cars and, subsequently, gas. All other purchases combined for a drop of 0.1 percent. Consumer prices also rose. The Consumer Price Index rose 0.3 percent, meaning that the cost of living is increasing in an era of high unemployment.

Watching for signs of deflation

The unemployment rate is still almost 10 percent, and recovery is progressing slowly. The Federal Reserve is currently looking for signs of deflation, which is where prices of goods increases while less money is available to go around. Less wealth is held in housing, and fewer people are employed fully. Overall conditions, including an increased savings rate, indicate trepidation of consumers to spend on larger items.

Further Reading

Christian Science Monitor

Wall Street Journal

Bloomberg

Credit cards can weigh a person down like an anchor, and fewer people are using them these days. Image from Wikimedia Commons.

As the recent unemployment and jobs report came in, so did some other data. Fewer people are using their credit cards this year, and people are using them less. As there is less short term credit available, fewer people want to use their credit cards as a source of instant cash. People are also saving more than they used to. Since consumer goods are such a large part of the economy, a counterproductive side effect of the recession is that less money gets spent on the frivolous goods that keep the economy rolling.

Credit card use falls

According the Wall Street Journal, fewer people are using their credit cards for consumer purchases. The amount of revolving credit (like credit cards or bank lines of credit – not like mortgages, payday loans, cash advances or student loans) being used in the U.S. has been declining. In fact, the use of revolving credit has dropped every month for the past 21 months consecutively. At this rate, the credit card companies are going to need a payday loan themselves.

Unemployment has a lot to do with it

One of the side effects of recessions is that people have less reason to justify non-essential purchases. They especially cannot justify making purchases with anything other than cash. If a person makes a big purchase like a new refrigerator or living room set on a credit card, making minimum payments for the next 50 years is not as palatable. The national savings rate, on the other hand, went up. It is currently at 6.4 percent, according to the Commerce Department, up from 6 percent in April.

Less security equals less frivolity

There is no point in buying unnecessary goods, particularly if you don’t know if you’ll be able to afford the payments a few months down the road. If you want to get out of debt and have some security, it makes no sense to incur further debt to do it, unless of course you can get a debt relief loan with an interest rate that’s manageable.

Further Reading

Wall Street Journal

Thanks to the government’s giant stimulus program, many Americans seem to be feeling a little better about their finances. Despite rising unemployment, personal incomes still rose 1.6 percent in May, according to the Commerce Department. But instead of heading back to the mall with that extra cash most Americans are making a beeline for the bank.

The U.S. savings rate recently reached 7 percent of disposable income – the highest it’s been since early 1990s. In the short term, such penny-pinching could delay economic recovery by suppressing demand. But in the long run it’s a good thing. It means families are working to reduce high debt levels, rebuild retirement accounts, and be better prepared for financial emergencies without resorting to unsecured personal loans.

Interest rates are down

Unfortunately, interest rates on most savings products are currently very low. Interest on savings accounts typically tracks the Federal Reserve’s funds rate, and right now that’s hovering between zero and 0.25 percent—its lowest level ever. One-year bank CDs are a slightly better option, recently yielding about 2 percent on average. Think twice, though, before committing to any period longer than that. “Short maturities give you the ability to reinvest so you can continue to stay ahead of inflation once rates and inflation perk up,” says Bankrate.com’s Greg McBride.

Treasury Inflation-Protected Securities are an attractive option over the longer term. Uncle Sam pays a fixed rate – recently 1.25 percent – plus an “inflation kicker.” If consumer prices go up, your principal will be supplemented.

Slightly higher online

A few banks are paying decent interest on checking and savings accounts, but you have to play detective to find them. Many smaller banks offer “rewards” checking accounts yielding 4 percent or higher in order to attract customers. But as Daren Fonda said in SmartMoney:

Does that make them a good deal? That depends. You can usually find a slightly better rate online, especially at one of the Internet-only banks that don’t have to pay tellers or other branch expenses and can pass on the savings. But the gap has narrowed as Internet banks have started to focus more on profitability than growth. “We’re getting as much money as we need,” says James Kelly, chief operating officer of ING Direct, the largest online-only bank, explaining why ING’s rates aren’t higher. Indeed, ING is now trying to get customers to branch out from basic savings to other services such as checking accounts and mortgages.

There’s only so much banking you can do with the click of a mouse, though. Most online-only banks have limited services, so you have to go elsewhere for extras like lines of credit or auto loans. Firms like ING Direct and Discover Bank don’t have their own ATMs, and customers may be charged fees if they want to withdraw cash from another bank’s ATM. Cashing a check can also be a hassle with a branchless bank. Customers either have to go through a traditional bank or mail in the check.