Even By Our Awful Standards, Americans Have Basically Stopped Saving Money

A woman pushes her cart full of toys at  a Toys-R-Us store, in Fairfax, Virginia  November 26, 2015, on a Black Friday sale that extended a day earlier into Thanksgiving evening. The  US holiday shopping season kicks off with 'Black Friday' -- the day after the Thanksgiving holiday -- with a frenzy expected at stores around the country as retailers slash prices.         AFP PHOTO/PAUL J. RICHARDS / AFP / PAUL J. RICHARDS        (Photo credit should read PAUL J. RICHARDS/AFP/Getty Images)
A woman pushes her cart full of toys at a Toys-R-Us store, in Fairfax, Virginia. PAUL J. RICHARDS/Getty Images

If you—like me— are a natural pessimist about the economy, now is sort of an eerie time. Overall, things seem good. Growth is solid. Unemployment is low. Companies are investing and home prices are strong. The stock market is going parabolic.

Even the more obscure stats worrywarts usually pull out to prove that things are less great than they seem are staring to look healthier. For instance, the number of Americans of prime working age who aren’t even looking for work has , since the Great Recession, suggested that the labor market was weaker than the official unemployment rate let on. But that number is finally crawling back to normal.

Of course, there are plenty of big, generational problems plaguing the economy, like yawning income inequality, deep poverty, and industry consolidation. But just thinking about the short term, there aren’t a lot of cyclical problems to fret about.

Except, perhaps, these two: First, even though the economy seems to be healthy, wage growth is still weak—at the moment, pay is rising not much faster than inflation. Second, Americans appear have all but stopped stopped saving money.

These two issues may be related.

Americans have never been the world’s best savers (our thin welfare state doesn’t exactly make it easy). But even by our own low recent standards, we’re collectively putting away an exceptionally small slice of our paychecks. In December, the personal savings rate dropped to 2.4 percent, its lowest level since 2005. Before that, the only other time it dropped below 3 percent was in Oct. 2001. This doesn’t appear to be a blip either. The savings rate has been burrowing lower for most of the past couple years.

U.S. personal savings rate

As the Wall Street Journal notes, the low savings rate may be a sign that Americans are simply feeling good about their financial lives. As a rule, families tend to spend more when stock prices and home values are rising, since they feel richer. Economists call this tendency the “wealth effect.” Middle class incomes have also posted some reasonably strong gains in the last few years, as more people have gone back to work. So it’s not surprising that, after many relatively frugal years in the wake of the recession, households would want to break out their credit cards and spend.

The problem is that some people are probably spending money they don’t really have. For all the good economic news, the one nagging weak point really has been wage growth. Families are making more than a few years ago. But not a ton more. It’s possible that we’ve reached the point in the business cycle where households are now excitedly spending paper gains after taking a look at their eTrade account or checking Zillow, even though they don’t have a lot of extra cash flow. Or, as the Journal’s Grep Ip tweeted, Americans may think “their assets are doing the saving for them.”

That can be a perilous assumption. But does it mean we’re setting ourselves up for serious trouble in a few years? Not necessarily. Recessions tend to have a mix of causes, like a sudden collapse in asset prices mixed with lots of debt. Right now, Americans are reasonably unburdened by loans, and credit growth has been pretty mild. While our savings rate might be back to oughties levels, we’re not collectively over-leveraging to buy McMansions and Ford Explorers.

That’s the optimistic case. A pessimist, however, might say that Americans have settled back into a pattern of spending today without worrying too much about tomorrow—and that tends to spell trouble at some point or another. If stocks or home prices drop, a lot of nervous households might look at their depleted bank accounts and decide to shut their wallets. If borrowing does eventually get out of control, you could see a rise in defaults the next time the economy gets rocky. Point being, if you’re on the watch for a sign of future trouble, America’s paper thin savings rate might be it.