Higher Income and Higher Saving Supports Strong Spending
Revisions to household financial data last week shed light on a puzzling aspect of the past year: why has consumer spending remained strong despite the overall negative consumer sentiment?
One reason for this resilience is job security. Jobless claims, which reflect layoffs, are currently at their lowest levels since 1969. The unemployment rate has consistently hovered around the Federal Reserve’s long-term estimate of maximum employment. This year, we’ve seen job growth surpassing what’s needed to match the expanding workforce.
Additionally, recent government data reveals that American households have been saving significantly more than earlier figures suggested.
The Bureau of Economic Analysis made annual revisions that increased the estimated personal savings by an average of $322 billion over the 12 months ending in July. This marks a notable rise of about 39 percent from prior reports. To put it simply, that’s a huge adjustment.
Previously, the annualized saving estimate stood at roughly $836 billion during that period, but it has now been revised to about $1.159 trillion. Households have been keeping much more of their income after taxes and spending than we initially thought.
More Income Behind the Spending
The most significant factor in this upward revision was the higher estimates of personal income, which were adjusted up by about $367 billion. Increased estimated tax payments accounted for about $131 billion of that adjustment. Meanwhile, personal expenditures were revised down by roughly $86 billion, which helped to explain the increase in savings.
Strong consumption paired with a declining saving rate might suggest that households are stretching their budgets to keep spending. However, higher income levels supporting both consumption and saving provide a sturdier basis for that spending. It isn’t a situation where families are depleting their savings or relying excessively on credit, which would lead to unstable financial situations.
For instance, in July, personal savings were previously estimated at $712 billion on an annual basis. Now, that figure has been adjusted to $1.112 trillion, reflecting a $400 billion increase. Consequently, the saving rate climbed from the earlier reported 3.0 percent to 4.6 percent.
Real consumer spending remained robust, increasing by 2.6 percent in August compared to the previous year. The revised accounts, therefore, reveal both significant spending growth and a greater ability to save.
Not All Declines Are Created Equal
It’s essential to understand that a decline in saving doesn’t always indicate financial stress. Some households might choose to spend a larger share of their income as their confidence in future earnings and job security grows. For example, the ongoing low jobless claims could encourage people to save less for emergencies. This seems to be what happened this summer, as the saving rate dropped to 4.1 percent in August from the revised 4.6 percent in July, with spending outpacing disposable income that month.
These revisions clarify why consumer spending has remained stable despite a bleak economic outlook. Even if consumers aren’t particularly optimistic about the economy, the income reports indicate they are in a better position financially.
This bodes well for the future. It reinforces the idea that recent strong consumer spending is likely to continue. Households aren’t running out of money due to drawing too heavily from savings. Instead, Americans have been spending based on a more substantial income base than previously assessed, while also saving more of that income than we realized.
