(Trend slows economic rebound, but promises stability in the longer term)

By Katherine Lewis

Special Correspondent

Washington — U.S. consumers have surprised economists and policymakers by paying off their debts and building savings faster than expected, a development that may slow economic recovery but bodes well for longer-term economic stability.

The U.S. savings rate rose to 6.1 percent in the second quarter of 2010, reaching a level well above what economists had expected. (The household savings rate is the level of people’s savings as a percentage of their disposable income.)

Experts thought American consumers would take a longer time to rebuild personal savings after years of relying on cheap credit and home equity loans to fuel spending. Morgan Stanley, the New York–based financial company, had expected consumers to take until at least 2011 to boost the national savings rate to 6 percent, from 2 percent in 2007. “Consumers have adjusted to the loss of wealth more rapidly than we expected,” writes the firm’s chief U.S. economist, Richard Berner, in a report on the phenomenon.

Leslie Jacobs, 50, a professional organizer in Connecticut, used to take four or five vacations a year and eat in restaurants several times a week. “The recession has forced me to cook,” she said. In addition to avoiding restaurants, she has pared her vacations to one per year, discontinued a maid service, and begun to borrow movies from the library rather than paying to see movies at theaters.

Consumers are “being forced by economic circumstances to be more careful with their funds,” said Kathryn Kobe, a senior economist with Economic Consulting Services. “In the short run, it is indicative of the difficult situation that consumers find themselves [in], as well as meaning much slower growth. In the long run, it’s a healthy thing for the economy.”

In the near term, the higher-than-expected savings rate puts pressure on economic recovery, because when people save more, they aren’t buying as many goods and services. U.S. consumer spending has been the engine of economic growth for the United States and the world in the modern era. Subdued U.S. spending will keep U.S. and world economies from bouncing back as quickly as they might otherwise, according to Kobe.

But in the longer term, several economists say, a higher savings rate and less debt are not bad at all because they give households a cushion to weather the next tough economic times. In the third quarter of 2007, U.S. consumers’ debt peaked at 125 percent of their annual household income — in other words, people owed banks roughly one-fourth more than they earned in a year — making the recession especially difficult to manage. Now, the debt is at 111 percent of annual income. Morgan Stanley believes that household debt loads should not exceed annual incomes, or, more specifically, that the debt loads should be between 80 percent and 100 percent of income levels over the long term.

In addition to providing stability for future hard times, increased savings predict some pent-up spending in the coming years. Consumer spending makes up two-thirds of the U.S. gross domestic product, and GDP growth is a gauge of overall economic health. The head of the U.S. central bank, Ben Bernanke, said recently, “Stronger household finances, rising incomes and some easing of credit conditions will provide the basis for more-rapid growth in household spending next year.”

Higher savings also have a positive effect on business growth. The cash that individuals put in bank accounts or investment funds is money that those institutions can lend or invest in businesses.

Ken Goldstein, an economist at the Conference Board, said that the U.S. economy is in a transitional period. “You can’t be in transition forever. At some point, the money that is being put aside now is going to get matched up with some of the new ideas for innovation and create a stronger economy. That’s coming down the road.”

The question is whether rediscovered thrift is a temporary reaction to particularly hard times or a more lasting reversal of a trend of falling saving rates that began in the mid-1990s. “We think the sea change in consumer behavior wrought by recession will persist over the next several years,” Berner concludes.

For her part, Jacobs vows that, even after the economy turns around, she’ll spend less and save more. “The one thing I’ve learned is that when you’re making hundreds of thousands of dollars, you should put it in the savings and checking account instead of spending it.”

(This is a product of the Bureau of International Information Programs, U.S. Department of State.  Web site: http://www.america.gov)