The Next Bailout May Come From Consumers

(Bloomberg Opinion) -- With markets focused on rate cuts from the Federal Reserve and what sorts of policy levers might be used in a downturn, we got good news this week in learning that Americans' personal saving rate is higher than previously thought. Should we enter an economic downturn in the near future, households will have room to spend more and save less, potentially meaning we wouldn't need as aggressive a response from the Fed or Congress.

Now that we know the saving rate is at 8.1%, rather than 6.1% as believed a month ago, we can see how different this environment is for households versus the past two cycles. In December 2000, on the brink of the 2001 recession, the saving rate was 4.2%. In December 2007, as the great recession was beginning, the saving rate was 3.7%. The saving rate would have to fall by around 4% -- equivalent to around $750 billion in annual consumption -- before households would find themselves as tapped out as they were then.

Consider how differently households and policymakers might be able to act if there were a downturn in the near term. Because the saving rate was low heading into the prior two downturns, households had to spend less and save more as the economy was turning down. This meant that some other actor had to pick up the slack -- in both 2001 and 2008 this meant aggressive interest rate cuts and a wider budget deficit through a combination of automatic stabilizers and fiscal stimulus. If households are going to save more, some other large entity -- the government, corporations or the foreign trade channel -- has to spend more.

With the saving rate high relative to the last 25 years, households aren't in the position where they need to save more. So if an economic shock originated elsewhere -- if corporations or the government found themselves needing to save more -- households could spend more. With consumption accounting for around 70% of gross domestic product, a downturn where households act as the steady hand would probably mean less need for stimulus overall, particularly important if the government had to save more -- perhaps if trillion-dollar budget deficits ever lead to higher inflation.

A glass-half-full view would focus on a different dynamic altogether: An elevated saving rate might mean this economic cycle could last for a lot longer than people expect. Typical conditions that have accompanied recessions in the past -- elevated levels of investment, a Federal Reserve that has tightened monetary policy too much, a surge in oil prices -- appear to be lacking in 2019. Households remain generally cautious toward their finances, with the scars of the great recession still fresh.

But if household psychology were to change, with consumers willing to spend more like they did in the latter parts of the last two economic cycles, that $750 billion in buying power would also lead corporations to invest more to meet that demand. It's unlikely that this would happen all at once, rather over several years as households and businesses got comfortable with a more optimistic economic environment. There's potential for significant growth driven by consumers. Worries about the Fed or Congress not having the resources to fight a downturn are probably misplaced.

The relatively muted pace of the expansion this decade is itself related to households not being willing to borrow and spend like they did. That level of caution may have meant a disappointing pace of economic growth, but it also serves as protection against a nasty recession.

To contact the editor responsible for this story: Philip Gray at philipgray@bloomberg.net

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Conor Sen is a Bloomberg Opinion columnist. He is a portfolio manager for New River Investments in Atlanta and has been a contributor to the Atlantic and Business Insider.