Recent trends show Americans are saving less of their paychecks each month, opting instead to increase their discretionary spending. While this strategy has bolstered consumer purchases and supported economic growth in recent months, forecasters warn that it may not be sustainable in the long run. As households aim to replenish their savings, experts predict a potential slowdown in consumer spending, making the economy more susceptible to a downturn or recession.
Consumer spending accounts for approximately 70% of economic activity in the United States.
According to data from the Commerce Department, the personal saving rate, which measures the portion of income saved by Americans, stood at 3.8% in January. This figure is notably lower than the recent peak of 5.3% observed last May and the pre-pandemic average of around 7%.
Gus Faucher, Chief Economist at PNC Financial Services Group, highlights that the historical average saving rate is approximately 6.2%. Faucher anticipates that consumers will adjust to their reduced disposable income by prioritizing saving in the coming year, which could dampen consumer spending growth in 2024.
Commerce Department data indicates a modest growth in spending of 0.2% in January, a decrease from the 0.7% growth recorded the previous month.
One contributing factor to this shift towards frugality is the anticipated surge in retirements this year, with a record number of Americans reaching the age of 65 and transitioning from employment income to retirement benefits such as Social Security and pensions.
Cynthia Woltjer, a 65-year-old retiree from Indianapolis, shares her experience of curbing expenses since retiring. Woltjer and her husband have reduced their dining out frequency to about twice a month from weekly, and they are now adhering strictly to grocery shopping lists to avoid impulsive purchases. Additionally, discretionary purchases, such as kitchen lights and summer attire, are being postponed due to budget constraints.
Woltjer attributes this shift in spending behavior partly to inflation, noting that the impact of rising prices was less noticeable when she was actively employed.
