During the first quarter, consumer spending continued to outpace the growth of after-tax income, so that the saving rate declined a bit further, to 1.0 percent. The current relationship between personal saving and disposable income is truly extraordinary by historical standards. During the past 40 years, personal saving has averaged 8 percent of disposable income, and the only historical evidence of negative personal saving was in 1933, in the midst of the Great Depression. Eventually, consumer behavior will begin to revert back to normal spending will lag behind the growth of income, and the personal saving rate will rise. The only question is when that process will begin and how fast it will proceed.
Conditions are ripe for the emergence of more cautious consumer behavior.
Perhaps largely as a result of lower equity prices, consumer confidence levels have fallen back to where they were 5 years ago, when the boom in equity prices was just beginning. Jobs are harder to find these days, and the unemployment rate rose to 4.5 percent in April. Consumers have bought large quantities of durable goods during the course of a long economic expansion, and their debt burdens have risen accordingly. Delinquencies on mortgage and consumer loans have recently begun to rise. Moreover, a sizable tax cut, which appears increasingly likely, will bolster after-tax incomes, and help to sustain consumer spending.