Amid Recession, U.S. Savings Rate Hits Highest Mark Since 1993

The Commerce Department reported Friday that consumer spending rose 0.3 percent last month, in line with expectations. Meanwhile, the savings rate that had hovered near zero in early 2008 surged to 6.9 percent, the highest level since December 1993.

Incomes jumped 1.4 percent in May, the biggest gain in a year. That easily outpacing the 0.3 percent increase that economists expected.

While the renewed focus on savings will help households stabilize their finances after a years-long credit binge and reduce U.S. dependence on Chinese investment, the lack of spending could restrain economic growth in the coming years, Lyle Gramley, a former Federal Reserve governor who is now a senior economic adviser with New York-based Soleil Securities Corp. told Bloomberg.

"There's been a fundamental change in people's behavior," he said. "It will affect the economy for years."

The income increase may also reflect temporary factors relating to the $787 billion economic stimulus program that President Barack Obama pushed through Congress in February. That program included one-time payments to people receiving Social Security and other government pension benefits.

The stimulus package also featured reductions in payroll tax withholding designed to get people to start spending more money and boost the economy. Those factors helped increase after-tax incomes 1.6 percent in May. However, without the special factors, after-tax incomes would have risen just 0.2 percent.

The savings rate, which is a percentage of disposable income, rose from 5.6 percent in April. Last month's savings rate was far above recent annual rates, which dipped below 1 percent from 2005 through 2007 as a booming economy and soaring home prices pushed Americans to spend most of what they earned.

Dean Maki, the chief U.S. economist at Barclays Capital in New York, said the saving rate will be "a weight, not an anchor" that restrains expansion, not stopping it. He foresees the economy growing 2.8 percent next year after shrinking 2.5 percent this year, according to Bloomberg.

Americans could be savings more than the government data suggest, he said. He anticipates the Commerce Department will revise the savings rate higher when it releases its so-called benchmark economic revisions on July 31.

The renewed interest in savings is good for most banks, with deposits growing 1.7 percent in May, the ninth-biggest monthly rise since 1973. Economists say a rise in the personal savings rate is a good development in the long run, but they worry that it could make the rebound from the recession - especially in the retail sector -- slower than it otherwise would have been.

However, the 0.3 percent rise in spending in May was viewed as encouraging after no change in April and a 0.3 percent drop in March. April had originally been reported as a drop of 0.1 percent. It was the best monthly performance since spending rose by 0.4 percent in February.

Consumer spending is closely watched because it accounts for about 70 percent of total economic activity. Economists are hoping that improved spending will help support a rebound in economic activity.

On Wednesday, the government reported that the overall economy, as measured by the gross domestic product, shrank at an annual rate of 5.5 percent from January to March, slightly less severe than the 5.7 percent decline estimated a month ago.

Still, that drop followed a 6.3 percent decline in the last three months of 2008, the worst six-month performance for the GDP in more than a half-century.