Savings Rates Could Double or Triple

One of the reoccurring questions that keeps popping up is whether the recession has caused a long-term shift in American consumption patterns. Former Federal Reserve economist suggests that a $14 trillion loss in personal net worth and rising long-term costs like health care will lead to much higher savings rates. See the following post from The Street, to learn more.

Paul Ballew is a former Federal Reserve economist. He currently serves as senior vice president of Customer Insights & Analytics for Nationwide Mutual Insurance Co. in Columbus, Ohio. He has also worked as an executive for General Motors and J.D Power.

There's no arguing that the economy is beginning to recover. Green shoots are more numerous and the return to more normal conditions in financial markets is certainly comforting. So 12 months post-Lehman, it appears that there is light at the end of the tunnel.

However, the severe economic contraction was not just happenstance. The structural problems in the economy were substantial and some issues, like the de-leveraging of households, are still working themselves out. In addition, the policy environment complicates the situation and will, in all likelihood, place further restraint on the pace of the recovery and eventually the expansion.

Beyond the headlines about Wall Street and beyond the policy debate in Washington, substantial shifts in consumer behavior on Main Street are going to have the most significant impact on the direction of the economy over the next few years.

Everyone is speculating about how consumer consumption and saving will be altered by the events of the past 18 months. While weak labor markets are an issue for American households, an even more pressing concern involves the fundamental need to rebuild balance sheets under those same roofs in preparation for an uncertain future.

Conventional wisdom seems to conclude that we should expect a few quarters of higher savings and then a return to the pre-recession spend-and-borrow tendencies of the past decade or so. However, the need to rebuild personal savings and portfolios is no small matter. Households have seen their net worth decline by $14 trillion at a time when future obligations like long-term health-care costs continue to increase.

There is good reason to expect household savings rates will have to double, and maybe triple, to support the healing of consumer balance sheets. This process will take years, not months.

In hard numbers, it means going from saving roughly $150 billion a year to $400 billion to $500 billion a year. This assumes asset prices appreciate at a moderate pace over the next few years -- not something that is guaranteed given the pressures coming from Washington.

A shift of these proportions will not only impact the pace of the recovery, it also has implications on sectors of the economy.

Consumer-product companies are likely to face a more frugal consumer even as the recovery picks up speed. The recovery may not be the retail panacea some assume.

Additionally, the retirement-planning business may have never looked better. Now more than ever, there is a tremendous challenge and an opportunity for financial experts to help households navigate the waters and address their anxieties after a decade of underperformance.

And as we all know, Washington remains the most challenging wild card. Changes in tax and regulatory policy by Congress, high deficits absorbing higher personal savings, and future actions by the Fed are all question marks that may alter the operating environment.

We are on the front end of a recovery, but we shouldn't underestimate the depth of the recession's impact on consumer saving nor the consequences for the recovery.

This post has been republished from The Street, an investment news and analysis site.