Thrift No Threat to Recovery, Economist Says

Posted by: Joe Weber on July 14

piggybank.jpg Thrift will not threaten the economic recovery, even as consumers stuff away cash in what could be a long-lived change in attitudes about savings, argues Morgan Stanley & Co. economist Richard Berner. The economist contends that the recent jump in the personal savings rate – up from 5.6% in April to 6.9% in May, according to the Commerce Department’s Bureau of Economic Analysis – does not signal “renewed retrenchment” by consumers but it does portend continuing high levels of savings.

In a July 14 report, the economist argues that consumer spending could rise in coming months. A “short-term bounce” is likely thanks to such measures as the “cash-for-clunkers” incentives the government is providing consumers to sell their old cars and buy new, fuel-efficient models. Further, he says, a “recovering economy should promote a modest acceleration in spending next year.”

“Modest” and “mild” are key words in his report. Berner maintains that a “slow return to thrift” is under way among consumers who had cut their savings rate below zero last year. He argues that this “sea change,” coupled with “aggressive deleveraging,” or the paying down of debt, will mean slower growth in spending in the next few years. The personal savings rate could climb as high as 10%, he suggests. The rate has been stable at about 4% for this year, adjusted for Social Security payments, tax refunds and cuts.

Aggressive savings can be harmful to the economy overall as reduced spending, output and incomes prolong a recession. This “paradox of thrift,” observed decades ago by econo-guru John Maynard Keynes, remains a “cyclical risk, because the perfect storm for consumers isn’t over,” Berner says.

Consumer confidence is threatened by rising joblessness and declining home values. Berner suggests that home prices may continue to slide as a moratorium on foreclosures expires and the number of vacant homes rises. On the job front, he notes that June’s weak employment report won’t be the last bad one, but the pace of job loss may be abating. Private job opening rates rose in May and Morgan Stanley has noted an uptick in hiring plans.

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BusinessWeek’s Joe Weber, Patricia O'Connell, Michelle Conlin, Frederik Balfour, Peter Coy, Greg Spielberg and Roger Crockett examine The Case for Optimism by looking past the financial turmoil and economic unrest gripping the globe to focus on the promising future that lies on the other side of this storm. We’ll chronicle the forward thinkers investing in R&D, launching promising new products, entering new markets, or implementing management and leadership.

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