Savings rate falls to lowest level since 2007

A recent report came out stating that Americans saved about 3.6% of their money during the month of September, the lowest level of saving since December 2007. Many argue that it is difficult to individuals to save because prices are higher and they must spend more of their disposable income on necessities.

By Annalyn Censky
October 28, 2011: 11:16 AM ET
CNN Money

NEW YORK (CNNMoney) -- The good news is, a recent pick-up in consumer spending is fending off fears of another U.S. recession.

The bad news is, it's coming at the expense of Americans' savings.

On average, consumers put 3.6% of their hard-earned dough into savings in September, the government reported Friday. It marks the lowest level of saving since December 2007, when consumers stashed away only 2.6% of their income.

But deciphering the meaning of the savings rate is a tricky business.

On one hand, many economists had hoped the Great Recession would spark a newfound period of thrift and frugality, lessening consumers' vulnerability to financial shocks in the future. (The recession did have this effect for a while, sending the savings rate as high as 7.1% in mid 2009.)

On the other hand, American businesses have argued that without an increase in demand for their products, there's no incentive for them to create more jobs. If consumers continue to save rather than spend their money, why should the restaurant down the street, the local big-box retailer or even large American manufacturers ramp up their hiring?

On Thursday, the government's latest report on U.S. economic growth showed that since July, consumers have started to slow down the amount they add to their savings, to ramp up their spending more instead.

Adjusted for inflation, consumer spending rose 2.4% in the third quarter.

That was not only strong enough to boost overall economic growth in the recent quarter, it also led some economists to boost their forecasts for fourth quarter growth.

But at the same time, others are reluctant to carry their optimism into their 2012 forecasts.

Mark Vitner, a senior economist at Wells Fargo, points out that the increase in spending has come even as consumers saw their disposable income fall 1.7% in the third quarter (adjusted for inflation and taxes).

"The sluggish income growth cast doubts on how sustainable the pickup in economic growth is," he said. "Without an increase in income, consumers can't afford to keep increasing their spending at the the pace that they have."

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