The great recession of 2008-09 seems to have changed the American consumer fundamentally. For at least 30 year prior to those shocking economic and financial events, households in this country could only be described as financially aggressive. They spent freely, accrued debt at rapid pace, and relegated savings to the status of an afterthought. In so doing, they helped propel rapid overall economic growth. But since the carnage of 2008-09, households have avoided debt and paid close attention to their rates of savings. Their behavior has contributed to the historically slow pace of this recovery, but at the same time it has also spared the economy the kinds of excesses that might have precipitated another recession. Looking forward, the critical question is whether the consumer will revert to his or her earlier patterns. It may be too early to give a definite answer, but it is nonetheless safe to say that such a reversion is not likely any time soon.
The old, free-spending American householder has received a lot of comment over the years. And statistics bear out the picture that the commentary painted. Between 1977 and 2007, consumers increased spending over 7.0 a year even though incomes from wages and salaries grew at only a 6.4 percent a year. That difference may not seem great when stated in annual terms, but over 30 years it amounts to a cumulative difference of almost 20 percent. It is then no surprise that during this time, the rate at which household’s saved fell from 10.2 percent of after-tax income to a mere 3.0 percent, while overall household debt increased a whopping 9.4 percent a year.
But the great recession seems to have sobered everyone. Between 2007 and 2011, household debt actually fell, by almost $825 billion or about 6.0 percent, an unprecedented event. Mortgage debt led. It fell by about 9.0 percent or by $915 billion, hardly surprising since the financial crisis revolved around it. But households have shown a reluctance to use other forms of debt as well, which have grown only 4.5 percent. Meanwhile households had strived to re-establish savings flows, bringing their rate of savings from a low of 2.7 percent of after-tax income in 2007’s third quarter to 6.0 percent by 2011. That rate remained, of course, below where it stood in 1977 and in earlier years, but since the only way to raise it at all was by keeping spending along a slower path than income, the change could only be described as a wrenching departure from former habits.
What may be more remarkable and suggests a different consumer is how households have remained highly cautious even as the recovery persisted. While incomes from wages and salaries grew 4.5 percent a year between 2011 and 2014, people resisted any temptation to leverage the gains, as they surely would have in earlier times. They increased overall debt at only a 1.4 percent annual rate and mortgage debt actually continued to fall, dropping 3.3 percent over that three year span. The same cautious pattern has prevailed so far in 2015. Though household incomes from wages and salaries continued to rise at a 4.5 percent annual rate between last December and March, the most recent period for which complete data are available, overall household debt only expanded at a 2.6 percent annual rate during the first quarter.
The behavior of savings is in many respects most interesting and more indicative of the changed attitude. Whenever, it seems, the savings rate has dipped below 5.0 percent of disposable income, households in subsequent quarters have restrained spending enough to re-establish a substantial savings rate cushion above 5.0 percent. In early 2010, for instance, when savings fell briefly toward 5.0 percent, households restrained spending growth to a mere 3.4 percent annual rate for the following two quarters, even as their overall incomes grew at a 5.1 percent annual pace, a difference that permitted them to bring their rate of savings back up to 5.8 percent by the third quarter that year.
Even now, almost six full years into this recovery, the same pattern persists. When in the third quarter last year, the rate of savings fell to 4.8 percent, households again slowed their spending sufficiently to bring their savings rates back up to 5.7 percent by February of this year. This restraint is that much more remarkable, because the drop in energy prices during the second half last year increased the overall real spending power of existing household incomes by four full percentage points. Instead of spending this windfall, as they certainly would have done in the past, households actually saved more than the entire real benefit from falling energy costs.
Though many journalists and Wall Street commentators are fond of declaring “water sheds” or “sea changes” or “tectonic shifts” or whatever metaphor they like to use, it is too soon to say that American householders have changed fundamentally. In time, economic conditions, particularly in the jobs market, may improve enough to bring out the old, aggressive ways, especially as memories of 2008-09 fade. That reversion to type is probably a good long-term bet. But especially given the recent response to oil prices, it is also probably a long way off. Consumers, then, though they will doubtless go through bouts of rapid spending growth, will likely remain restrained and in so doing will help keep the overall recovery slow. Disappointing as that may be, it does also suggest that for the time being the economy will avoid the dangerous excesses that would otherwise threaten recession.