American economy: Personal savings up; Household debt down

In spite of this, there will be a recovery. Over time, the headwinds of consumers paying down debt will fade. The process is about halfway done. Personal saving had already risen to 6% of income by the summer of 2010, from under 2% in 2005. Some optimistically reckon that’s as high as it needs to go. Meanwhile, household debt peaked at 135% of disposable income in late 2007; by the middle of 2010 it had fallen to 123%. Economists at Deutsche Bank project that, if the saving rate stays at 6%, banks continue to write off bad loans at their current rate and income grows by about 4.5% a year, that ratio will be down to 107% by the end of 2011.

If this debt-reduction is gradual enough, households can save more and spend more at the same time. However, this assumes that they are not hit by some shock to their incomes, such as a rebound in unemployment, a large increase in taxes, higher interest rates or a new surge in oil prices.

Cheer up: The American economy will defy the pessimists [via]