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American economic growth is proving solid and broad, but a warning signal may be flashing under the surface: personal savings as a share of disposable income is falling rapidly.
That’s important, because consumers make up roughly 70 percent of the economy and are a key driver of economic growth, and they can only push savings down so far before it hampers their ability to keep spending more. If their shopping plateaus or advances more slowly, that could curb how fast the overall economy can expand.
Overall, economic growth climbed by 2.6 percent on a quarterly basis at the end of 2018, data released Friday showed. The expansion was driven in large part by personal consumption, which picked up substantially in the fourth quarter — a move that came as the savings rate slumped to 2.6 percent as a share of disposable income, its third-lowest on record.
“It’s not a good look for the savings rate, and it certainly looks like consumers have drawn down their savings to support spending,” said Omair Sharif, senior U.S. economist at Societe Generale in New York. That could limit the growth gains this year, “unless you’re able to get those wage numbers to pick up,” he said.
Natixis’ Joseph LaVorgna makes the case that the fall in the consumer savings rate is overstated. The initially reported figure is regularly revised up, he points out, so “the saving rate is probably a couple of percentage points higher than what the official numbers show,” he wrote in a Jan. 25 research note.
If he’s wrong and the rapid drop is genuine, it could mean that unless better wage gains materialize, other parts of the economy will need to pick up the slack to keep growth accelerating at its recent pace into 2018. That could prove a heavy lift.
“You can’t hand off to business investment, because it’s not a big enough chunk to take on the weight in powering growth forward,” Sharif said. Capital expenditures have been picking up in recent quarters as growth broadens, but that may not be enough to overcome any slowdown from American households.
“Really, as the consumer goes, so goes GDP.”