The Savings Conundrum

Consumers have started to sock away their money, typically a good sign for the economy in the long run. But the effects on auto finance are yet to be decided.

These days, the personal savings rate has climbed to 6%, from about 1% in 2005. Higher savings typically encourage more investing and lead to improving standards of living, pointed out Chicago Fed Economist Bill Strauss in a presentation yesterday at the Auto Finance Summit.

But if consumers are saving more, they’re spending less — a scenario that could hurt the economy in the short term. Consumer credit outstandings, as compiled by the Federal Reserve Board, fell to $2.42 trillion in the second quarter, from $2.51 trillion in the prior-year quarter.

To boot, car dealers have noted lately an increase in cash buyers. With the saving mentality, some consumers figure that if they’re going to buy a car, they should do it without credit. It will be interesting to see how long this shift in mindset continues.

My guess: another 12 to 18 months.