Absent net fiscal social benefits, the U.S. household savings rate is even more negative than it was at the peak of the housing boom.
Social spending is deeply entwined with household income and has become part and parcel of consumers’ savings decisions as its share of household income has steadily risen. According to our Bank Credit Analyst service, after adjusting to remove the effect of social benefits, the saving rate as a share of disposable income is negative 7%. This rapid aggregate dissaving is being driven by two fundamental factors. First, higher commodity price pressures have sapped household purchasing power. Second, disposable income growth has been stagnant for the better part of four years. With social benefits already comprising a big part of household income and playing a critical role in forming future expectations, any uncertainty surrounding benefit flows risks driving consumers to ramp up the savings rate in an attempt to protect or rebuild their cushions. Recessions are always associated with rising thrift and politicians must therefore tread very carefully on social benefit reforms, especially at a time when global economic conditions are fragile.