Spending Up, Incomes Flat, Savings Down

Some strange and contradictory news on our nation's economy; consumer spending was up in February, even though incomes were stagnant.

Consumer spending increased 0.3%,, and though February marked the fifth straight month with an increase, it was the smallest increase since September.

The February income number was the weakest since July, when incomes actually shrank.

People generally aren't inclined to increase spending when their incomes are flat, especially during a recession. So what gives?

The answer is that Americans tapped into their savings to fuel the spending uptick.

Americans saved 3.1% of their disposable income in February, down from 3.4% in January. That's a difference of 0.3%, exactly the same as the spending increase. It' wasn't a coincidence.

The savings rate dropped to its lowest reading since October 2008, when the financial collapse began.

The resulting fear and panic from the recession lead people to stop spending as much and instead begin paying down debts and saving. Those were both wise and, perhaps, expected choices given the environment.

Since consumer spending accounts for 72% of GDP, it's a good indicator of how the economy is faring. If people aren't spending, the economy is shrinking – unless the government leaps into the void, as it did last year.

Historically, savings rates tend to increase during times of recession.

During the early 1980s, when the economy was in a severe double-dip recession, the annual personal saving rate (effectively, income minus spending) averaged around 10%.

But by the time of the 1990-91 recession, it had fallen to an average of 7%.

And by 2001, the rate had fallen below 2%. As the decade progressed, it even fell below 1% multiple times.

The reality is that rate has been falling steadily for many years. In fact, in 2005, at the height of the American spending and debt binge, the savings rate actually turned negative for the first time since the Great Depression. And it stayed that way for a couple of years.

But when the economy nearly collapsed in 2008, the savings rate started to trend higher. It jumped from 1.3% in January of 2008, all the way to 6.9% in May of 2009 – the highest rate in 15 years.

However, it declined once again, to 4.2% in December of 2009. And now it's on the decline once again.

The previous uptick in savings had been a good sign, indicating that Americans were putting an end to their debt-based spending.

A higher savings rate is critical because it makes more money available for business investment. And it can reduce the need to borrow from overseas.

But it also led to a slow down in the economy.

Last week, the Commerce Department reported that personal income in 42 states fell in 2009. Nationally, personal income from wages, dividends, rent, retirement plans and government benefits declined 1.7% last year, unadjusted for inflation.

If Americans are worried about jobs and wages, then they won't continue to spend. Instead, they remain in retrenchment.

But if the car breaks down, or medical bills need to be paid, they will tap their savings – until there are no savings left to tap.