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Frugal Savers Stall the Economy

Economists do not seem to be able to decide what the average family should do with their income. The rap on the US economy for years has been that no one in the USA saves enough. Too many families retire with insufficient savings and end up being a burden on the younger generation is how the argument by economists goes. Now, however, people are saving more and the economists are still upset! It turns out that frugal savers stall the economy, or at least they did in April 2015. Bloomberg reports that consumer spending stalled in the first quarter as wage earners saved more and spent less.

Consumer purchases unexpectedly stalled in April as Americans used income gains to shore up savings, raising the risk the biggest part of the economy may take time to gain momentum after a slow start to the year.

The unchanged reading in purchases followed a 0.5 percent gain the prior month that was larger than previously estimated, Commerce Department figures showed Monday in Washington. The median forecast in a Bloomberg survey of 79 economists called for a 0.2 percent rise. Earnings increased 0.4 percent, more than projected, and the saving rate climbed.

Consumers, who’ve been using the money freed up by low gasoline costs to pay down debt or rebuild their balance sheets, would be more inclined to shop as wages accelerate. Sustained improvement in household spending, which accounts for almost 70 percent of the economy, is needed to ensure growth rebounds as Federal Reserve officials project.

As frugal savers stall the economy is that a good or bad thing? Over the long run the USA needs to up it savings rate. In the short term people need to spend in they want the economy to grow. For the individual investor it is best to save and invest while hoping that everyone else goes on the spending spree!

Manufacturing Back on Track

Whether frugal savers are stalling the economy or not, US manufacturing is picking up again. ABC News reports that US manufacturing growth accelerates for the first time in half a year.

The Institute for Supply Management, a trade group of purchasing managers, said Monday that its manufacturing index rose to 52.8 last month from 51.5 in April. That’s the highest reading since February. Any reading above 50 signals expansion.

The pickup in factory activity suggests the economy may be growing again after shrinking in the first three months of the year. Still, overall growth remains slow, held back by a range of factors. Americans have been reluctant to boost spending, even as hiring has been healthy and lower gas prices have left them with more money to spend.

And the dollar has risen sharply in value, which makes U.S. goods more expensive overseas and drags down exports. Economists forecast the economy may expand at a 2 percent annual pace in the April-June quarter, after shrinking 0.7 percent in the first three months of the year.

As the report indicates the fly in the ointment for manufacturing is the continued rise of the dollar. A stronger dollar hurts exports which in turn will hurt manufacturing, jobs and income.

Rising US Dollar

Seeking Alpha asks why the U.S. dollar is rising.

The U.S. dollar is rising as business spending strengthens, benefiting economic activity in the country.

The U.S. economy is strengthening as business spending rises. New orders of capital goods [are] rising alongside increasing shipments. As economic activity continues to expand, the Federal Reserve will be more likely to tighten policy, leading to gains in the U.S. dollar.

While frugal savers stall the economy on a month to month basis it will be the rising US dollar that makes exports noncompetitive and will eventually bring the dollar back down and stimulate the economy again as part of the eternal business cycle.

Frugal Savers Stall the Economy PPT





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