The Commerce Department has reported that people are responding to the stimulus package’s tax cuts by putting away more money for a rainy day.
In May, the personal saving rate soared to 6.9 percent — the highest level seen since December 1993. It’s an encouraging turnaround from the nadir of the housing bust, when the average American spent more than they earned in a year.
But there is a downside to all that saving. The harder consumers pinch their pennies, the longer it will ultimately take for the economy to recover. Less money spent at the mall or going out to eat means more employers have to cut costs to stay afloat — often by laying off workers. This phenomenon is what economists call “the paradox of thrift.”
So what’s a concerned consumer to do? It may seem counterintuitive, but if you’ve got a healthy emergency fund in place to cover your expenses for a few months, it would actually help the economy to loosen the purse strings.
If you need permission to shop or go out to eat, you now have it. Don’t go crazy and blow the budget, but cash-starved businesses will thank you!
