Two forces that until recently turbo-charged US consumer spending—growing household debt and a falling savings rate—have gone into reverse. In late 2008, as households started reducing their indebtedness and saving more, consumption tumbled.
New research from the McKinsey Global Institute shows that the economic impact of further US consumer deleveraging will depend on income growth. Without it, each percentage point increase in the savings rate would reduce spending by more than $100 billion—a serious drag on any recovery. Relatively healthy income growth, on the other hand, would help households reduce their debt burden without trimming consumption as much.
The significance of any fall in consumption could be profound. US consumers have accounted for more than three-quarters of US GDP growth since 2000 and for more than one-third of global growth in private consumption since 1990. These trends were fueled by a surge in household debt,1 particularly after 2000 (Exhibit 1), and a decline in the personal savings rate—to a low of –0.7 percent, in 2005. From 2000 to 2007, US household debt grew as much, relative to income, as it had during the previous 25 years.