Magazine article American Banker

Will Increased Savings Touch off a Recession?

Magazine article American Banker

Will Increased Savings Touch off a Recession?

Article excerpt

Economists generally agree that the slowdown could boost savings, a potential boon for banks -- but it might also reduce demand for bank loans.

Robert W. Strand, a senior economist at the American Bankers Association in Washington, said last week that "it's just consumer spending" that is keeping the economy going right now, but it is clear that "we need more savings."

Some economists argue that reduced consumption and increased saving might be good for banks: Consumers might boost equity investments, contribute more to retirement plans, tap credit lines for home improvements, or park more cash in deposit accounts.

On the other hand, consumer saving could push the economy into recession, said some economists at a two-day conference late last month sponsored by the Jerome Levy Economic Institute of Bard College in Annandale-on-Hudson, N.Y.

According to the Commerce Department, the personal savings rate as a percentage of disposable income improved to a negative 0.8% in March, up from negative 1% in February and negative 1.3% in January.

Mr. Strand said that higher savings rates would benefit credit quality in the banking industry as consumers start to pay back loans, but that could also mean that banks' balance sheets would contract if consumers pay down their debt and do not take out new loans.

"The consumer sector is vulnerable," said Peter Hooper, a managing director at Deutsche Banc Alex. Brown, the U.S. securities unit of Deutsche Bank AG, during the April conference. He expects the unemployment rate to rise to over 5%, which would sharply curtail housing sales and productivity. And, Mr. Hooper said, higher savings might not directly influence deposits.

At least one of his fears seems to have been confirmed Friday. The Labor Department reported a 0.2% rise in unemployment last month, to 4.5%, and the increase occurred not only in manufacturing but also in service industry jobs. …

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