Americans Finally Get It, But Is Saving Money Slowing Recovery?

The numbers show that Americans took home more money in January than economists had expected. The 1% gain in income was much higher than the 0.3% that most analysts were calling for at the beginning of the year. Changes in taxes are responsible for the majority of the extra cash that workers took home. Unfortunately, the rise in income hasn't resulted in a large advance for the economy, which is still holding steady at old levels.

Trends Show People are Making More Money

Tax credits helped American workers bring home larger paychecks in January for the first time in months. This increase in income should have had a definite impact on the economic recovery that is still in its infancy. If more people have more money, it would make sense that they would begin to stimulate the economy through more purchases. The recession has lasted long enough and cut deep enough that consumers seem to be approaching their increased income in a highly cautious manner. Many workers chose to put their new windfall into their savings accounts rather than taking it out on the town.

Tax Cuts Having a Limited Impact

Studies have shown that higher wages due to tax cuts traditionally do not have a large impact on the overall economy. People realize that the increase in their income is due to a single tax-related event, so they do not settle into a comfortable new spending habit because they are aware that the windfall will not continue throughout the year. Instead of purchasing big ticket luxury items with their extra money, they tend to put it into a savings account so that they will be more prepared if the economy does not improve quickly.

Consumers Still Cautious

This caution translates to fewer people spending money, even though they have more money to spend. While creating a larger savings account can be beneficial in the long run, it does not make any change in the current economy. In fact, when large numbers of people begin to store their money away, it can have a negative impact on consumer confidence, which can cause the economy to stop growing altogether. It is a positive sign that Americans have realized that they need to keep a larger amount of their money in savings to be prepared for a weaker economy, but this current trend may be too little too late to do much real good.

Higher Wages Being Stored Away

The increased income was not generally large enough for people to do much more with it than pad their regular savings accounts. The economic benefits of serious investments are not realized when people keep their cash piled up in standard savings with their local banks. The banks will be able to offer more funding for local businesses due to the higher savings accounts, but the overall economic impact will be far less impressive than it would have been if everyone had used the extra cash to purchase items and boost the manufacturing sector.

Economic Change Depends on Spending

Tax incentives are usually designed to provide people with a quick jolt of income that they will take into the community to spend on consumer goods. A widespread spending spree could create more demand in the marketplace, which would need to be filled by manufacturers. In theory, higher demand should cause manufacturers to need to hire more employees. This economic cycle would then snowball as more people find jobs with the rejuvinated manufacturers and these new employees begin to spend money that had not been in the marketplace while they were unemployed. A higher demand leads to more employees which continues to create a higher demand.

Recovery Remains Slow

When everyone puts the money into a savings account rather than purchasing goods, the recovery cycle that the cash injection was supposed to create is stopped before it can begin. Economic indicators are still moving in a positive direction, but the increase in income over the last few months has not caused the recovery to speed up in any way. A large uptick in spending during December was followed by a drastic reduction in spending during January, even though people were taking home more money than they made in the previous month.

Heather Hollingsworth is a single mother raising three teenagers while she attends graduate school and feeds a budding freelance writing career. She's always looking for a new way to stretch a dollar as far as it can go!