America Is Saving Again: But at What Cost to the Economy?

One of the positives to emerge from the financial crisis is that Americans have become more conservative in the way they manage their money. Individuals are saving more—just look at today’s savings rate, which stands at over 5 percent. This is an astounding shift from five years ago.

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In 2005, Americans were enamored with what many coined the “wealth effect.”

Employment rates were strong and home values had risen in value, leaving consumers feeling extremely confident about their financial health.

That confidence led consumers to spend their income at such a rapid pace that some went so far as to dip into their savings.

As a result, the personal savings rate in the U.S. fell to -0.5 percent, marking its first descent into negative territory since the Great Depression. Fast-forward to today’s rate of over 5 percent, and the comparison is stunning.

Personally, I’m thrilled to see Americans saving again. It’s a sign that they are taking control of their own fiscal responsibility, and that’s a good thing.

Here’s where it gets complicated: The money that Americans are saving is money that is not being invested in the economy. Think of the economy as a car and the cash as gas. Without the gas to run, the economy doesn’t have the fuel it needs to move forward.

A Double-Edged Sword

But let’s face facts. With unemployment at over 9.5 percent, we can hardly expect Americans to have the stability or confidence to start spending at any significant levels. In fact, how could we ask them to do something some of the largest U.S. corporations can’t do themselves?

American companies have been hoarding $1.8 million in cash. Fortunately, there has been an increase in the number of companies putting that cash to work. For example, we’ve seen a significant number of mergers and acquisitionsas of late.

"Companies will scale back investments by 15 to 16 percent in order to comply with the Basel rules, and that takes fuel out of the economy." -CNBC, Maria Bartiromo

And just last week Cisco made headlines with news that it will pay a 1 percent to 2 percent dividend for the first time next July.

However, what we haven’t seen from U.S. companies is the confidence to begin hiring workers—a necessary ingredient to getting the economy back to full health.

Last week I sat down with Bank of America’s CEO, Brian Moynihan, and one of things we discussed were the new Basel III rulesfor financial companies and their impact on the economy.

Moynihan described the newly-outlined standards as a “reasonable balance,” but cautioned that the rules call for a serious increase in capital. “We have to be careful from here that we don’t add on a lot of stuff and make it even more difficult," he said. "We are going to slow down economic growth a lot. Every 100 basis points of [required] capital would change the balance sheet of a financial company by about 15 to 16 percent.”

Think of it this way: Companies will scale back investments by 15 to 16 percent in order to comply with the Basel rules, and that takes fuel out of the economy. This doesn’t diminish the positive impact the Basel rules will have on lowering risk, but it does challenge companies to make every investment count.

Going Global

Moynihan went on to explain that many companies have begun investing in Asia, Latin America and South America, particularly Brazil, to maximize growth. This is something I’ve been hearing time again and time again from Wall Street executives.

The reason is simple. Markets in these regions are growing at a much faster rate than the U.S. economy. Until the American consumer can safely get back in the game, the emerging markets consumer will have to pick up the slack. (You can watch my full interview with Brian Moynihan here.)

Unfortunately, the emerging market consumer cannot help the U.S. housing market. This is one sector that has been deemed “missing in action” in our economy. With a record number of U.S. consumers still out of work, and no additional incentives in sight, this is one sector I suspect may remain MIA for some time.