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Swimming in Cash, But Still Feeling Poor

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Companies and consumers are saving, keeping the recovery at bay.

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The US economy appears to face a classic chicken-or-the-egg conundrum: The economy is slow because consumers aren't spending, and consumers aren't spending because the economy is slow, giving just about everyone a case of job-loss jitters.

The result: personal savings are up while spending is down. Long term, this is important because consumer spending represents about two-thirds of the nation's Gross Domestic Product. Increased savings plays out against the current unemployment rate of 9.5% -- and many analysts expect it to top 10% before recovering.

Consumers are stashing cash and hunkering down: Personal savings increased to $355.6 billion in September from $307 billion in August, boosting savings as a percentage of disposable income to 3.3% in September from 2.8% in August. Year-over-year, money saved in September rose 153.5% from $140.4 billion saved in the same month a year ago.

There appears to be no immediate relief in sight. Instead of creating new jobs, the corporate sector is choosing instead to sock its cash away, just like consumers. The Wall Street Journal reports that companies are holding more cash and a greater percentage of assets in cash than they have in the last 40 years.

This suggests that many of the nation's 500 largest firms aren't spending now but are ready to start reinvesting to meet increased demand when the economy rebounds. But the economy -- and the consumer -- may not rebound until jobs pick up again. The chicken, or the egg?

Texas Instruments (TXN), a semiconductor maker, bought two small companies and has $2.8 billion in cash and short-term investments on hand. Google (GOOG) has about $22 billion on hand, the Journal reports.

Even the very banks where consumers are stashing their money are hoarding it themselves. Bloomberg reports that the four largest banks -- Bank of America (BAC), JPMorgan (JPM), Citigroup (C), and Wells Fargo (WFC) -- have increased their liquidity levels by 67% since last year.

Government programs have tried to tackle the problem with limited success. The now-expired Cash for Clunkers program appeared to take taxpayer money out of one pocket and stuff it in another, creating little real or lasting economic growth. Edmunds.com reviewed the program and said it added only 125,000 additional car sales beyond what consumers would have purchased on their own. Edmunds.com then divided the program's $3 billion in federal funding by 125,000 and calculated the cost to taxpayers at $24,000 for each additional car sold.

After climbing in July and August, auto sales fell 10.4% in September. This suggests the auto sector won't provide much of a boost to the economy in October or through the end of the year.
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No positions in stocks mentioned.
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