Savings Rates and the Great Recession's Ripple Effects

Many people old enough to retire will have to remain in the workforce, and today's young generation will feel the effects of the sluggish economic recovery for years to come, according to a study recently released by the Mortgage Bankers Association (MBA).

High unemployment could impact lifetime earnings for young people, as well as their attitudes toward risk and social policies, the study says. Those nearing retirement may find they need to put it off to rebuild some of their wealth that was obliterated by the recession.

Americans Boost Personal Savings Rates

The MBA study, sponsored by the Research Institute for Housing America, noted a thorny paradox. Americans have increased their personal savings rates and will continue to cut their spending to rebuild their net worth. Yet consumer spending accounts for two-thirds of the gross domestic product. Reduced spending is likely to delay and weaken the recovery. A slow, weak recovery means a slow return to high interest rates on CDs, money market accounts, and savings accounts.

Study author Joe Peek, the Gatton Endowed Chair in International Banking and Financial Economics at the University of Kentucky, called it the "paradox of thrift."

The study examined consumer spending and saving rates, credit supply and implications for the robustness of recovery.

The housing outlook is grim. Peek does not see a meaningful decrease soon in loan delinquiencies, home foreclosures, and bankruptcies because high unemployment and low housing prices are projected for an extended period.

"Such headwinds to a strong economic recovery are likely to have lasting impacts on the values and behavior of the current generation, much as the Great Depression had on its generation," he writes.