How Personal Savings Affect the Economy
How Personal Savings Affect the Economy
Brett Klein | Partner | August 15, 2023
Despite the economic uncertainty of the past year, everyday individuals and households have been resilient. Consumer spending has remained steady in the face of high inflation, rising interest rates, housing market challenges, and layoffs in sectors such as tech. While it has helped that the recession anticipated by many investors and economists has not materialized, this fact is partially due to the strength of consumer finances. How do consumer balance sheets look today and how might this impact the economy and markets in the coming year?
Personal savings have helped to cushion consumer finances
Household debt service has risen but is still historically low
Additionally, trends such as wage growth due to the strong job market could support both spending and savings. The latest report from the Bureau of Labor Statistics shows that wages rose 4.8% year-overyear. While this has generally been slower than inflation, hourly earnings are still rising at their fastest pace in 40 years. This is happening at a time when the national unemployment rate, at 3.5%, is near historic lows. Job openings have fallen to 9.6 million, but this still represents 1.6 openings per unemployed person across the country.
Consumer sentiment is only slowly improving
Of course, how consumers feel can differ from their financial pictures, especially as they look to the future consumer confidence, as measured by the University of Michigan Survey of Consumers, has suffered over the past year due to inflation and economic uncertainty. Fortunately, this is slowly improving as the economy stabilizes. According to the same survey, consumers expect inflation of 3.4% in the next year which could then decline to 3% over the next 5 years. While these represent high inflation rates, they are far better than what many had feared even just six months ago.
The bottom line? Consumers have been an engine of economic growth over the past three years. Although savings rates have fallen, the strong labor market and manageable debt service levels have supported consumer spending and the broader economy. From a financial planning perspective, investors should continue to save appropriately, ideally with the guidance of a trusted advisor, to achieve their long-term goals.
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