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Savings, Labor Productivity, and Household Debt

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Savings, Labor Productivity, and Household Debt

Savings, Labor Productivity, and Household Debt 
By Perc Pineda, Chief Economist & VP, Research | AFSA

The personal savings rate has decreased to 4.4% in April – down from 12.6% a year earlier and 33.8% two years prior. The decrease in savings reflects spending among Americans that hasn’t slowed and the effect of inflation on household budgets. As inflation dilutes consumers’ purchasing power, consumers switch to less expensive goods – known as the substitution effect. However, households’ consumption substitution is hampered by lingering supply chain issues including shortages of some consumer necessities   

The labor market remained strong in May—despite higher interest rates affecting business costs—supporting healthy consumer spending. The unemployment rate held steady at 3.6%. The labor participation rate was virtually unchanged at 62.3% and the average hourly earnings rose by 0.3% to $31.95 in May. However, labor productivity decreased by 7.3% in Q1-2022, the largest quarterly decline since Q3-1947, while unit labor costs increased by 12.6% according to the U.S. Bureau of Labor Statistics. The combination of lower labor productivity and higher labor costs—which reflects flawed structural policies in the economy—is unsustainable. Although employment income has not deteriorated so far, expect businesses to freeze hiring or cut staff as the economy slows.  

Household credit access plays a significant role in closing the gap between disposable income and escalating prices. Last year closed with a household debt to GDP ratio in the U.S. at 80.0% in Q4-2021. The increase in interest rate—particularly in home mortgages—could temper household debt growth this year.  

June 7th, 2022 by