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June 2nd, 2009

Should Americans Be Saving or Spending?

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Last month we wrote that a bi-product of the current recession has been America’s “shift to savings“. Yesterday the Bureau of Economic Analysis (BEA) released the latest figures on personal income versus spending. In April personal income increased by $58.2 billion, or 0.5%, and disposable personal income rose $121.8 billion, or 1.1%. However, personal consumption expenditures declined $5.4 billion.

Is the fact that Americans had more money but spent less of it in April a good or bad thing?

Financial expert Peter G. Miller argues for the sake of saving:

While I understand the argument of those who want more spending, the reality is that the country will be better off if people are not impoverished and living paycheck to paycheck. One of the reason for so many foreclosures and bankruptcies is that many people have little or nothing in the bank for emergencies. That doesn’t make a lot of sense in an economy where people are losing jobs and cutting back hours and days is common.

More savings — I say it’s better to save then to spend. In time your country will thank you.

READERS: Are you siding with Miller, or do you believe consumer spending is the way to get this economy back on track?

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4 Responses to “Should Americans Be Saving or Spending?”

  1. Lucia Says: June 3rd, 2009 at 7:03 pm

    What would the consumer buy? During the past 5 years the average consumer has upgraded and fixed their home, bought top-of-the-line appliances, furniture, leading edge electronics, new cars for both spouses, recreation vehicles, enlarged or added a garage, or moved into a larger home. Considering the economic life of these items, what’s left to buy at this present time? The answer is, food, fuel and necessities. Larry Summers quipped that the economy would recover because the consumer needs to replace things, but he failed to consider that these things take time to wear out. Even a pair of good shoes can last years. During this time of uncertainty, I believe the consumer has a responsibility to society to take care of their own affairs by living below their means and saving for emergencies or future purchases.

  2. Tim Manni Says: June 4th, 2009 at 9:32 am

    Hey Lucia,

    “What would consumers buy?,” anything, it doesn’t have to be big stuff.. We’ve gotten two stimulus checks in the past year or so b/c Treasury officials believed consumer spending would help reinvigorate the economy. You even pointed out how some economists like Summers see how consumer spending would turn things around. Haha, but obviously we all know now how ineffective those stimulus checks are. Bush’s stimulus went right to gas, bills, and my savings account. Obama’s $10 extra bucks per paycheck is appreciated, but it’s not doing squat to increase my spending or living conditions.

    You make a great argument for saving. Especially during these times, big purchases are taking a back seat, people aren’t treating themselves as much as they used to. But what about less expensive purchases that used to be a part of people’s daily schedules? People have cut out the morning cup of coffee of places like Dunk & Donuts or Starbucks, and have cut out their weekly trips to the mall.

    People don’t need to spend big, they just need to spend. But how can we possibly do that with an unemployment rate near 9%? I wish consumers had enough so we could save and spend, but times are so uncertain that we should be saving.

    Great argument, thanks as always,
    Tim

  3. Lucia Says: June 4th, 2009 at 1:10 pm

    Tim, I suppose it depends what you mean by “on track”? If you mean like it’s been for the past 5 years, then nothing can be done. Those days are gone, at least for the next 10-20 years, or the rest of my life, whichever comes first. The New Normal includes a modest recovery with less lavish spending and more spending for necessities. I hope the consumer has learned a hard lesson for the future: that good times should be used to prepare for the inevitable lean times. Not that the consumer should live an austere life of deprivation, but occasional recreational spending or gift buying is good for mental health.

  4. Tim Manni Says: June 4th, 2009 at 1:20 pm

    Lucia,

    You are right. Sometimes I forget about that fact — “back on track” to the way things were may never happen again. I’m curious how long this new consumer attitude will last thought. I guess as long as conditions allow. Sometimes people have a short memory and revert back to the ways that got them in trouble in the first place. But you’re right (and your points have been right on lately), things aren’t going to return to the way they were, at least not in the next few years.

    Thanks for keeping me in check,
    Tim

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HSH.com's daily blog focuses on the latest developments in the mortgage and housing markets. Our mission is to relate how changes in mortgage rates and housing policy, as well as the latest financial news, impacts consumers, homebuyers and industry insiders alike. Our 30-plus years of experience in the mortgage industry gives us an edge as we break down the latest changes in an ever-changing market.

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Tim Manni is the Managing Editor of HSH.com and the author of their daily blog, which concentrates on the latest developments in the mortgage and housing markets.

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