Short-term Setbacks, Longterm Sustainability

Personal savings rates reached a 15-year high during the month of May, signaling that American consumers may have learned their lesson from the current recession. 

"The unfortunate thing is that high savings in the short run is not good in terms of the recession ending," Kevin Mabe, chief economist with Farmers Insurance Group in Los Angeles, told CNNMoney.com. "But what savings allows us to do is to use money for long-term growth. We can't spend anymore. The consumer is tapped out."  

Until recently, Americans had been relatively good at saving.  From the 1950s through the 1980s Americans saved, on average, eight to 10 percent of their earnings. Over the last decade that savings rate actually turned negative at one point in time.  From mid-2005 to late last year, personal savings rates actually remained in the negative. 

Fueled by extremely low interest rates and other forms of cheap credit, Americans amassed massive amounts of debt over the past decade, which only worsened the recession.   

Now, however, many consumers are beginning to come to their senses and are not spending so frivolously.  Sales of big ticket items such as cars and homes are down considerably.   

"We are seeing a consumer pullback, especially in big ticket items like autos," Kevin Mabe told CNNMoney.com.  "Money may not be all going into the bank because there could be some debt reduction going on. But it is surprising how savings have bounced from zero to where it is now so quickly." 

Many believe that the increased savings rate is not a mere flash in the pan, either.  Some expect the savings rate to continue rising for the foreseeable future.  That may make the long slog out of the recession that much tougher, however, it will make the American economy more sound in the long-run. 

"We are turning from a nation of spenders to a nation of savers. You've had two bear markets this decade. It has an effect on the psyche of the American investor and consumer," said Keith Springer, president of Capital Financial Advisory Services. "Savings were down to ridiculous levels and now people are panicking and holing up in their house."  

While the economic adjustment may be painful, it is absolutely necessary. An economy that sustains itself on frivolous spending by consumers who do not have the means to buy the products they are buying is completely unsustainable and a recipe for disaster. Even though times may be tough now, if Americans continue to save, it will pay off in the long run. Without consumers spending fueling the economy, policymakers may just realize that manufacturing is the real engine that drives a powerful economy. This current recession is without a doubt due to a lack of manufacturing jobs in this nation that produce wealth.  

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