Spending Or Saving

The government released January personal income data today and, sure enough, personal incomes were sharply down, falling 3.6 percent from December.  If you have been following Along The Gradyent this is old news.  Last month I blogged on how Obama’s built to last monetary and economic strategies, and tax policies, were combining to drive down the purchasing power of ordinary working stiffs, despite his claims that he was just “asking the wealthiest to pay a little more.”

What I did not know last month was how ordinary US consumers would adjust their spending patterns to the loss in purchasing power.  It turns out in January they forged ahead as if nothing happened.  Spending grew a normal 0.2 percent.  The way consumers got there was by dropping savings rates from 6.4 percent to 2.4 percent.  If this reduced-savings reaction continues it marks a return to the pre-financial meltdown days of the under-saved consumer – no built to last recovery -- instead an over-leveraged and financially unstable economy that sooner or later will go south in an incredibly ugly way.  On the other hand, if the reduced savings reaction does not continue, that means spending decreases and the recovery stalls.  Obama’s manipulative rhetoric notwithstanding, he cannot have it both ways.  It’s one way or another and neither is attractive.