The wealth effect is in full force, it seems.
The Wall Street Journal reported Monday (Jan. 29) that stock prices, levitating as they are, and stronger employment data have prompted Americans to open their wallets. And yet, all that spending means less saving for retirement.
Data from the Commerce Department shows that household net worth is up from $56 trillion as measured in 2008 to as much as $97 trillion in the third quarter of last year. With greater wealth comes a higher propensity to spend, and the Journal noted that when asset values grow, the buying pace quickens – and yet, that also comes with a savings rate that dipped to a 12-year low at the end of last year.
Incomes were higher, but only by a bit, and reflect the lowest level since the housing boom (home equity levels also had a wealth effect). The Commerce Department said the savings rate was 2.4 percent of disposable income in December 2017, a significant drop from the 6.6 percent seen in 2009 just as the recession ended. Debt levels are similar to what they were, standing at $15.1 trillion at the end of the third quarter last year, and $14.2 trillion in 2007.
The lower savings rate, of course, shows a spending spree at work, where consumer spending grew at a 3.8 percent annualized pace, as measured in the fourth quarter. As many as three million Americans will get bonuses as the tax reform takes effect.
Some surveyed economists stated that “it is too soon to ring alarm bells.” The savings rate may have taken a hit as the new tax rates took effect, boosting take-home pay. Said Stephen Stanley, chief economist at Amherst Pierpont Securities, “If the saving rate is still down in the two percents by mid-2018, then you can begin to worry, but any anxiety over this now will almost certainly prove to be misplaced.”