Theories Fly As U.S. Savings Climb

Economists ponder a riddle

On a monthly basis, the U.S. personal savings rate is nothing if not variable--moving from a low of 3.6% last April to a 33-month high of 5.7% in September. Smoothing these swings, however, reveals that the long-depressed savings rate has actually been trending upwards for the past two years (chart).

Such a trend could have both good and bad implications. Noting that it coincides with the recent surge in household purchases of mutual funds, economist Edward E. Yardeni of Deutsche Morgan Grenfell thinks it may reflect the long-awaited pickup in retirement saving by aging baby boomers.

"That would be good for the economy's long-term growth potential," he says, "but it could jeopardize the continuation of the current expansion."

Philip Suttle of Morgan Guaranty Trust Co. doubts that demographic factors explain the savings pickup, however. For one thing, he points out that households have been aggressively selling equities they hold directly even as they have been loading up on mutual funds, so that their net market exposure in recent years hasn't risen as much as it seems. And the stock-market boom suggests that households with big capital gains could eventually decide to save less, as they apparently did during the market boom of the 1980s.

Rather, Suttle believes that the recent savings rise represents the third phase of a normal cyclical pattern. During a recession, he notes, consumer spending on big-ticket durable goods tends to collapse and the savings rate rises smartly. Once a recovery gets going, however, pent-up demand unleashes a surge in durables spending that depresses the savings rate. And finally, when that pent-up demand is exhausted, spending growth slows and the savings rate starts to edge up--as it has been doing since the summer of 1994.

In short, says Suttle, "we are now in the mature phase of the business cycle, in which household consumption tends to respond to economic growth rather than to drive it." With exports and capital spending sustaining economic growth next year, Morgan Guaranty predicts that consumer spending will pick up steam again--though with less gusto than earlier in the cycle.

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