Business

Consumers holding back on spending – and that's a good thing

Consumer spending is still low, but that's not so bad. Savings rates are inching up, and they are a key to economic stability.

Richard Drew/AP

Consumer spending stayed low in June, but the good news is that people put more money in banks. The savings rate reached 6.4 percent of disposable income.

By Mark Trumbull Staff writer

Aug. 04, 2010, 12:20 p.m. ET

US consumer spending failed to rise in June, but in one sense that is good news.

Because Americans didn't earn any more income in June than in May, their hesitancy to expand spending represents a "new normal" that's more like the "old normal."

Once again, it's in fashion for many households to save a chunk of the pay they take home each month. In June, America's personal savings rate edged up slightly, to 6.4 percent of disposable income, according to the Commerce Department in a report Tuesday. Personal income and spending were essentially flat for the month.

For years, an unusually low rate of savings has been a trouble spot. It's a problem both for families and for the economy at large. It means many households are poorly prepared for emergencies or for retirement.

And it means that the nation has fewer domestic resources available to finance growth in the economy. Economists say that America's penchant for borrowing from other nations, and for importing more than it exports, are to some degree side effects of a low savings rate.

Seen in that light, a rising savings rate is one step toward putting the nation on a sounder footing for stable growth in the years ahead.

The savings rate may now be recovering to levels above 6 percent, last seen (on a calendar-year basis) in the early 1990s. From 1950 to 1985, annual savings rates of 8 percent of disposable income were common.

The catch for now is that consumer spending is needed to drive an economic recovery. But the problem isn't the savings rate, many economists say. It's the slow pace of real income growth.

Average per capita income, adjusted for inflation, is higher now than it was before the recession began in 2007, according to government numbers tracked by Charles McMillion of MBG Information Services in Washington. But in a written analysis Tuesday, he noted that this is the case mainly because of unusual government stimulus efforts.

Real wage and self-employment income is lower now than in 2007, he finds. Moreover, although "average" per capita income is up, he says that doesn't mean that a majority of households are better off. In recent years, incomes have been rising fastest at the top end of the income scale.

With income growth tepid, consumers are "still hesitant to purchase cars" and other goods, says Jessica Caldwell, who tracks the auto industry at Edmunds.com in Santa Monica, Calif.

Reports from carmakers on Tuesday shows that auto sales have edged up compared with a year ago, but that the industry's recovery from recession is a slow one.

Against this backdrop, with some forecasters worried that the economy could dip back into recession, Federal Reserve Chairman Ben Bernanke has taken a cautious stance. He has warned that federal support for the economy, such as tax cuts, shouldn't be withdrawn too soon. But he said this week that gradual gains in consumer spending should sustain a recovery.