Spending more, saving less. Uh-oh.

By Paul R. La Monica, editor at large


NEW YORK (CNNMoney.com) -- We all supposedly learned our lesson. The credit bubble and Great Recession taught us to be more fiscally fit. Save more and spend within your means. For a while, it looked like a new era of thrift was upon us.

But is that era already coming to a close? The government reported some slightly alarming figures about personal spending in January on Monday. Spending was up 0.5% from December even though incomes rose just 0.1%

paul_lamonica_morning_buzz2.jpg

More disturbing though is the fact that the savings rate, which had been above 4% for the past months, fell to 3.3%.

Are consumers becoming reckless again? Yes and no. The good news is that it doesn't appear as if people are loading up debt to fuel purchases.

"This is not a credit binge. Bank loans continue to contract," said Keith Hembre, chief economist with First American Funds in Minneapolis.

Instead, it looks as if the increase in spending was a direct result of people dipping into their savings. That's the bad news. The savings rate has inched up dramatically from virtually zero before the recession to as high as more than 6% last spring.

Most economists believe that consumers need to do a better job of saving in order to avoid another economic disaster like the one we've lived through since the end of 2007.

However, there may be reason to take a tiny bit of solace from the decline in the savings rate in January. At least consumers felt comfortable enough to spend despite the tepid increase in income.

That's important because it is actual spending -- not the nebulous, touchy-feely consumer confidence numbers that get so much hype -- that is the most important barometer of consumer sentiment about the economy. So the January increase in spending is a small step in the right direction.

This also helps explain some of the confusing and occasionally conflicting reports about consumer confidence over the past few weeks.

Despite the talk about people growing increasingly jittery about the economy, several consumer companies -- ranging from retailers J.C. Penney (JCP, Fortune 500) and Home Depot (HD, Fortune 500) to shoe makers Deckers Outdoor (DECK) and Steven Madden (SHOO) -- have given healthy outlooks for the remainder of the year in the past few weeks.

"There is a lot of pent-up demand for goods but no income growth yet," said Diane Swonk, chief economist with Mesirow Financial, a diversified financial services firm based in Chicago. "At the end of the day, the only way for consumers to spend more is to tap into savings a bit. That shows a little more confidence, but little is the operating word."

Swonk believes that the savings rate will continue to fall this year as consumers spend more, but that this is a necessary evil to get the economy back on track. She also said that, over time, the savings rate will probably climb again as the U.S. economy becomes more dependent on exports.

"For the longer term, we want a higher savings rate, but without spending now there is no recovery," she said. "Its important for consumer demand to help create jobs. That's the only way to get into a self-sustaining recovery."

Zach Pandl, an economist with Nomura Securities in New York, agreed that a more robust job market is the key to the economy getting back on solid footing. And he said there were some encouraging signs of this in the January spending and income report.

He said that if you look past the headline income growth number, which includes things such as tax refunds, Social Security payments, and investment income in addition to wages, salaries actually rose at an impressive rate in January.

Wages and salaries were up 0.4% in January from December. That's the fourth straight monthly increase. And if people with jobs are earning more, they might be more inclined to spend. That could help create the self-sustaining recovery Swonk spoke about.

"There has been a very impressive rebound in consumer spending. If wage growth continues to pick up, consumer spending will hold up," Pandl said.

That's probably true. But the problem is that even if wage growth continues, the decline in other sources of income is not something that should be easily dismissed.

Hembre said he expects a reduction in so-called transfer payments, i.e. unemployment benefits, Medicaid, earned income credits and other government payments to consumers, this year compared to 2009.

That, combined with the price of oil and gas rising sharply from last year's levels, should lead to little growth in disposable income -- even if salaries increase.

So with banks still reluctant to extend new lines of credit and income growth stagnant at best, people are either going to be forced to drain their savings further or just start spending less.

Spending less is the financially responsible thing to do, and it would have the most benefits for the long term. But if people do really resort back to saving more and consuming less, we can probably kiss chances of a robust recovery in the next few months goodbye.

-- The opinions expressed in this commentary are solely those of Paul R. La Monica.  To top of page

Just the hot list include
Frontline troops push for solar energy
The U.S. Marines are testing renewable energy technologies like solar to reduce costs and casualties associated with fossil fuels. Play
25 Best Places to find rich singles
Looking for Mr. or Ms. Moneybags? Hunt down the perfect mate in these wealthy cities, which are brimming with unattached professionals. More
Fun festivals: Twins to mustard to pirates!
You'll see double in Twinsburg, Ohio, and Ketchup lovers should beware in Middleton, WI. Here's some of the best and strangest town festivals. Play
Overnight Avg Rate Latest Change Last Week
30 yr fixed3.80%3.88%
15 yr fixed3.20%3.23%
5/1 ARM3.84%3.88%
30 yr refi3.82%3.93%
15 yr refi3.20%3.23%
Rate data provided
by Bankrate.com
View rates in your area
 
Find personalized rates:
Index Last Change % Change
Dow 27,094.79 -52.29 -0.19%
Nasdaq 8,182.88 5.49 0.07%
S&P 500 3,006.79 0.06 0.00%
Treasuries 1.77 -0.01 -0.67%
Data as of 7:48pm ET
Company Price Change % Change
Bank of America Corp... 29.82 -0.18 -0.60%
Advanced Micro Devic... 30.29 -0.13 -0.43%
Microsoft Corp 141.07 2.55 1.84%
General Electric Co 9.42 0.04 0.43%
Ford Motor Co 9.10 -0.15 -1.62%
Data as of 6:30pm ET

Sections

Bankrupt toy retailer tells bankruptcy court it is looking at possibly reviving the Toys 'R' Us and Babies 'R' Us brands. More

Land O'Lakes CEO Beth Ford charts her career path, from her first job to becoming the first openly gay CEO at a Fortune 500 company in an interview with CNN's Boss Files. More



Most stock quote data provided by BATS. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer. Morningstar: © 2018 Morningstar, Inc. All Rights Reserved. Factset: FactSet Research Systems Inc. 2018. All rights reserved. Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor's Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2018 and/or its affiliates.