As reported in previous posts, The Obama administration has forecast that the U.S. federal government will rack up another $9 trillion in debt over the next 10 years (barring the enactment of tax increases and/or new spending programs). That forecast was based upon an assumption that economic growth will rebound vigorously from the current recession. The growth forecast appears to be reasonable — topping out at a 4.3% inflation-adjusted rate in 2012 — as it is consistent with the experience of recent U.S. economic history. (You can see the assumptions here. Click on the “economic assumptions” tab.)
But what if the assumptions are wrong? What if economic growth is slower than forecast? How much higher will the budget deficit be then?
Here is bad news for anyone who thinks that the economy will rebound as strongly as in the past three recessions: A recent survey by AlixPartners, a global consulting firm, suggests that consumer spending, which has driven past economic recoveries, will be far weaker than in the past. In a survey of 5,000 households, Americans said they plan to start saving 14% of their earnings on average when the recovery takes hold. If they make good on their intentions, observes AlixPartners, $1 trillion a year of consumer spending would be sucked out of the American economy.
Admittedly, there’s a big different between what Americans say they will do and what they actually will do. The chances that the U.S. savings rate will actually reach 14%, in my estimation, are remote. Look at our history: Household savings rates wobbled mostly within the 7.0% to 12% range from the end of World War II through the early 1990s, then plunged to 2.0% or below for most of the 2000s, sinking as low as 0.3% in 2005. A 14% rate would exceed the historical highs for the past 60 years, according to St. Louis Federal Reserve Bank data.
Are the respondants to the AlixPartners poll engaging in wishful thinking? Perhaps. But consider this: Personal savings have increased to 5% of income this year, no mean feat when unemployment is heading toward 10% and underemployment is rampant. Consider also that Baby Boomers have awoken to the need to plan for retirement, which means they must build savings in a big hurry, and Generation Ys, convinced that the U.S. social safety net will be in tatters by the time they retire, aspire to savings rates of 20% of income.
Let’s ponder what would happen if U.S. personal savings simply returned to historical norms of 7% to 11%. Let’s say only $700 billion a year gets sucked out of the economy as Americans start saving more. The Gross Domestic Product is roughly $14.3 trillion. That’s equivalent to about 5% of the GDP. In other words, there will be roughly 5 percentage points less economic activity than would have been the case if savings had remained at the dismal levels of the 2000s.
How many trillion dollars will that add up to over the next 10 years? I can’t say — I’m not smart enough to do the math. But it’s a lot.
For the record, I think a higher savings rate is a good thing — for the individuals who do the savings. Americans need to sock a way a lot more money if they want to enjoy their retirement. The larger pool of savings also also will dampen future increases in interest rates.
Unfortunately, what’s good for Americans as individuals may not be good for Uncle Sam. If AlixPartners is right about the “new normal” in spending and saving patterns, the new-found American frugality will dampen spending, near-term economic activity and government receipts. Deficits will run even higher than forecast, and the looming fiscal apocalypse will be even closer than we can imagine.
Have a nice day!
