It is a very rare occurrence when I agree with the Washington Post’s Robert Samuelson, and disagree with Dean Baker, but this morning is once. Samuelson wrote that:
[T]he 2008-2009 financial crisis and the Great Recession… changed economic psychology, precisely because they were unanticipated and horrific. They transcended the experience of most Americans (that is, anyone who hadn’t lived through the Great Depression)….
The financial crisis and Great Recession have left a thick residue of anxiety. Companies and consumers responded by restraining spending, which (of course) weakened the recovery.
The problem is that the data refuses to agree with his psychoanalysis. As I pointed out yesterday, consumption is actually higher as a share of GDP than it was before the downturn, indicating that fear is not keeping households from consuming in any obvious way.
Respectfully to Prof. Baker, this morning’s report on April income and spending shows that American households continue to demonstrate Keynes’ paradox of thrift.
The good news is, real personal income, both with and without taking into account government transfer payments, rose to new highs.
This is why this year’s “shallow industrial recession” shown in industrial production generally, and steel and rail particularly, hasn’t spread to a recession in the entire economy.
The bad news – for economic growth – is that they didn’t spend any of that increase, as real personal consumption expenditures for April, like the more narrow measure of real retail sales, declined ever so slightly.
Simply put, Americans continue to save rather than spend their money they are no longer spending to fill up their gas tanks.
As a result, the personal savings rate went back up to 5.6% in April. But to put that in context, here is the graph of the personal savings rate going all the way back to 1990:
In the early 1970s, the personal savings rate was as high as 14%+. As the graph shows, it gradually decreased to 2% in 2005. It has been increasing secularly since. Note that the sudden decline at the beginning of 2013 marks the time when the temporary 2% reduction in Social Security withholding expired. Consumers responded not by cutting back, but rather by digging deeper into their savings. Since then, the increasing secular trend has reasserted itself.
This is of a piece with the steep decline in household debt burdens that began with the Great Recession.
So I think Samuelson is correct that the events of the last 10 years profoundly affected consumer psychology, leading to more cautious spending. That households are rebuilding their balance sheets is a good thing – in moderation – so long as it merely holds back growth a little and doesn’t tip us back into recession.