That whole Age of Frugality thing didn’t last long, did it?

U.S. real personal consumption grew in February at a respectable 0.3 percent clip, the fifth straight such monthly rise, a fact widely greeted as news that the recovery is on course. The fly in this tasty soup, however, is income, which in real terms didn’t increase at all, not even by one tenth of a percent.

American’s did this neat trick — spending more while earning the same — the old fashioned way: they cut back on luxuries … like saving.

Savings as a percentage of disposable personal income fell to 3.1 percent from 3.4 percent the month before and down from a recent peak of 6.4 percent in May 2009. In fact, the last time the savings rate was lower was October 2008 when a market maelstrom was convincing so many people, apparently falsely, that something rather dangerous and important was wrong with the economy. In real terms, consumption is only very slightly below where it peaked in 2007.


What happened? Well, from a certain point of view the medicine of reflation worked. Low rates punished savings and also drove the stock market and other risk assets higher. The fall in housing prices abated, leaving many personal balance sheets in better shape. Given the shape of the job market, I think we have an answer to the question of whether asset price inflation drives spending. It did during the boom and it is again now.

Government transfers helped too. They hit $2 trillion for only the second time in history, as payments from the common coffers such as social security and unemployment insurance now comprise more than 18 percent of income.
This does not have to end terribly, but it most certainly does have to end.