Savings rate jumps to highest level in 15 years

In the June editorial, I wrote that consumers were sharply adjusting their spending/borrowing/saving habits.

Here's the proof, from this report on May incomes: "With the boost to incomes, the savings rate rose to 6.9%., the highest in 15 years."

Unfortunately, the "boost to incomes" referred to was primarily due to one-time stimulus checks sent to roughly 50 million Social Security recipients in May. It would be easy here to spin off-topic on the idea that this "income boost" basically amounted to working taxpayers paying off debts for (mostly) retired folks - probably not a great strategy for getting the economy humming again.

Instead, we'll keep the focus on what the recipients did with that extra "income" - they mostly saved it or used it to pay off debt (those two activities look the same in this particular statistical measurement). That's good on the personal level; it's what they almost certainly should be doing with that extra money.

But it also shows why one-time stimulus payments are typically ineffective at stimulating the economy. The people receiving the money don't spend it, and it's basically just a transfer from one group of citizens to another (normally from those who pay income taxes to those who don't, or at least from those who pay a lot of income tax to those who pay relatively little).

More importantly, it shows the headwinds the economy is going to have to fight as it eventually returns to health. The "New Normal" idea is based, in part, on the prediction that people aren't going to simply return to the irresponsible spending habits of the past few years. Rather, they're likely to take any increases in income to pay down debt and increase savings, as is evident in this May data. To what extent people continue to do so, and for how long, once the recession ends, will determine to some degree how quickly the economy returns to health. Ironically, what's good for individual financial health (debt reduction and savings increases) is bad for the short-term health of the economy. But that's the price we pay for past excesses.

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Mark Biller is Sound Mind Investing's Executive Editor. Visit www.soundmindinvesting.com to learn more.