Why Americans are saving more and spending less

Americans are reining in spending and saving more, according to the latest report personal income and spending report from the US Commerce Department.

Savings among US households jumped to a combined $753.3 billion in December, the highest savings rate since 2012. A rise in income and a decline in personal consumption were the largest contributors, although a decline in the cost of food and energy also played a role.

Personal income rose by about 0.3 percent in December, according to the Commerce Department's report. Following a two-month high in October and November, wage and salary income rose by only 0.2 percent in December, but real disposable income saw a 4 percent increase in the final month of the year.

Wage and salary incomes only saw slight increases, and Americans are choosing to save what they can of that extra cash. The amount that Americans put away in savings rose by 5 percent during the last six months of 2015.

Why are Americans saving more? A decline in energy prices may have played a role. December’s warm spell meant that many Americans spent less on utilities than projected, and China’s rocky economy translated into rock-bottom gas and oil prices worldwide. For Americans, not having to spend as much on their energy bills may have also translated into putting more aside in savings.

Americans also chose not to spring for year-end car sales in December: car purchases declined by approximately 0.9 percent during the last month of 2015. According to Barclays Research, Americans also weren’t too keen on durable and nondurable goods, with each showing an 0.7 and 0.2 percent decline, respectively. All told, real personal spending increased by only 0.1 percent for December, compared with a 0.4 percent jump seen in November.

How will all of this affect the first quarter of 2016? MFR, Inc. economist Joshua Shapiro predicts that several factors, beyond the current labor market, could change Americans’ current spending habits. These include consumer perceptions about the relative strength of the US economy. MFR also projects that the downward trend in spending could continue as America’s older population seeks to increase its collective retirement savings.

But IHS Global Insight, an economic analysis firm, predicts that consumer spending could pick back up in the first quarter of 2016. Spending on energy and other utilities showed a decline in December thanks in large part to unseasonably warm weather, but those spending patterns may return to normal as weather patterns also begin exhibit more normalcy. IHS Global Insight also projects that consumer spending on durable and nondurable goods is likely to show an increase in the first quarter of the year.       

“Consumers in the US. have gotten a little savings religion given what happened in the previous decade with the financial crisis, but I don’t think they’ve completely changed their habits,” First Trust Portfolios LP deputy chief economist Bob Stein told Bloomberg. “Eventually, consumers are going to loosen up on their pocketbooks and their wallets.”