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If the U.S. economy develops trouble any time soon, it will occur somewhere other than the household sector. American consumers, quite contrary to their profligate behavior in the past, have maintained a remarkable discipline throughout this recovery, keeping spending growth in line with income growth and improving their balance sheets. This behavior has slowed the pace of overall economic growth, but it has also prevented the excesses that have led to corrections in the past.
The pattern has persisted right up to the most recent data available. Commerce Department reports show that household income from all sources in October grew 0.61 percent (7.6 percent stated at an annualized rate). Income from wages and salaries grew only slightly slower at 0.55 percent (6.8 percent annualized). Spending was well within these limits—it grew only 0.29 percent during the month (3.5 percent annualized). During the past year, spending has increased a reasonably robust 3.7 percent, but still no faster than overall income and considerably slower than income from wages and salaries, which grew 4.6 percent.
Household savings, as a consequence, have held up well. In October, the Commerce Department tracked the flow at fully 5.9 percent of after-tax income. During the past year households have taken 6.0 percent of their after-tax income to either set aside in savings vehicles, purchase financial assets, or pay down debt. To some, that might seem like a small portion, but it is large compared to historical experience, when American consumers saved at barely half this rate. And this prudent approach has typified the last seven years of this otherwise disappointing recovery. Indeed, in just the last year, households set aside or paid down debt by some $860.2 billion, 4.0 percent more than last year. Though less than the 7.9 percent increase between 2014 and 2015, this rate is still impressive.
Balance sheets show clear signs of this prudence. According to the Federal Reserve, household net worth has jumped 6.1 percent during the past year. To be sure, some of this reflects gains in the value of real estate and stocks. But much has come from caution in the way people have managed their finances. Household liabilities have only grown 3.3 percent during this time. Liabilities as of the third quarter of 2016, the most recent period for which complete data are available, averaged 92.6 percent of annual household income, down from 92.8 percent in 2015 and 96.1 percent the year before.
Many people worry that this recovery has gone on so much longer than past recoveries that it is due for a correction, a recession. But such things do not happen by the clock. Recessions occur when one or more sectors of the economy have extended themselves and created unsustainable imbalances. That may be true in some sectors. But as far as the household sector is concerned, which comprises fully 80 percent of the economy, no such imbalances seem to have developed.
Milton Ezrati is an economist and author who has worked in the financial services industry for decades and currently serves as chief economist of Vested.