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Savings rate falls as spending outpaces income gains

October 28, 2011|Don Lee | Los Angeles Times Staff Writer

Are Americans returning to their profligate spending ways?

Some may be asking that question after the latest government report showed consumer spending in September rose by a surprisingly robust 0.6%, even as personal incomes barely grew over the month. And adjusting for inflation, after-tax income in September actually fell by 0.1%, the Commerce Department reported Friday.

Put all that together and you get a sharp drop in the saving rate last month, to 3.6%. That's the lowest level since 2007 and a drop from about 5% to 6% during most of the last two years.

Scott Hoyt, who studies consumer spending for Moody's Analytics, says it's possible that the September consumption number may have been inflated by a burst of expenditures for repairs and other things after Hurricane Irene in late August. Yet other data suggest that people are spending more as lenders have loosened up a bit on credit and as households, which had put off buying new cars and other goods, feel a little better about where the economy is headed.

In fact, the University of Michigan's latest consumer sentiment index, reported Friday, showed confidence improving by 1.5 points in October to 60.9. That reversed a preliminary reading that saw a drop of nearly 2 points from September.

Confidence should get a further boost with the recent rally on Wall Street and retreat in gas prices, and this week's report indicating third-quarter economic output accelerating to an annual rate of 2.5%, almost double the second quarter.

Even so, with the housing market still depressed and job growth so weak that it's not keeping up with new workers coming into the job market, it's hard to see how the pickup in consumer spending can be sustained. That is, unless households reach deeper into their savings or start taking on more debt.

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