June 4, 2008 / 3:27 PM / 9 years ago

Newfound savings penchant could retard growth

3 Min Read

WASHINGTON (Reuters) - U.S. consumers are socking more money into savings, as fears of a weakening economy may be making them reluctant to spend their tax rebate checks, according to analysts who say that may mean the economy faces a prolonged period of slower growth.

In fact, consumers have been slowly rebuilding savings since hitting a low point in November 2007, when they drew down savings in order to keep spending. Since November's negative 0.1 percent savings rate, it has slowly climbed to reach 0.7 percent of disposable income in April.

Economists say Americans will feel pressure to keep adding to their piggy banks at least into next year because of worry about job prospects and rising pressure on household budgets from soaring prices for gasoline and food.

"There is a realization, almost an urgency, for households to now get their own finances in order," said Bernard Baumohl, managing director The Economic Outlook Group in Princeton Junction, New Jersey.

As of last Friday, the U.S. Treasury had mailed out tax rebate checks of up to $600 for individuals and $1,200 for couples, worth a total of $50.041 billion. The rebates are part of a $152 billion stimulus program signed into law in February by President George W. Bush aimed at giving the flagging economy a quick lift.

Consumers Jittery

Economists, however, think much of the money will be directed by jittery consumers toward reducing existing debts, instead of more spending on goods and services.

"If people are looking ahead to next winter and thinking how much it is going to take to fill up the heating oil tank ... it is not going to help the economy in the short run," said Gary Thayer, senior economist for Wachovia Securities.

There is evidence people are shopping less. Last week's personal income report showed that spending rose a meager 0.2 percent in April after a 0.4 percent gain in March.

And a Reuters/University of Michigan Survey of Consumers data showed consumer confidence in May dropped to its lowest level in 28 years, a signal that consumers are not about to open their wallets easily.

"Whenever you have confidence levels that are down to 28-year lows you can be sure that people are not in the mood to continue spending at the pace they have in the past," said Baumohl.

Opinions vary among economists about how much of the economic stimulus payments will be directed toward reducing debts and coping with rising energy and food prices, but all agree it will be a substantial portion. The more that goes toward debts, the less the immediate kick for the economy.

"There is a lot of uncertainty around this and there is a risk that people could be far more austere and as a result water down the stimulus effect," said Richard DeKaser, chief economist for National City Corp. in Cleveland.

Editing by Leslie Adler

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