Seventy percent of Gross Domestic Product growth comes from consumer spending. With median incomes having fallen since 2000, it's a miracle that we experienced any economic growth during the last decade. It turns out that the economy grew because people borrowed money. When investors realized that much of that borrowing would not be paid back, stocks lost most of the value they had gained during the decade.

But despite record government efforts to encourage people to borrow even more, consumers are hoarding every penny they can get. Or at least they're saving at a higher rate than they have in the last 15 years. That boost in savings -- to 6.9 percent of disposable personal income in May -- led to $768.8 billion in personal savings -- the largest since records began in January 1959.

In 2007, the savings rate was at -0.7 percent, the worst since 1929. In March 2007, I posted that a negative savings rate could be a predictor of economic trouble ahead -- and I advised investors to get into money market funds to avoid the pain that would follow a clearing out of excesses resulting from too much debt. I may have been right and 2008's $30 trillion loss in stock market value appears to have narrowed that income inequality gap somewhat.

So now that consumers have found savings religion, is it time to buy consumer stocks? It's hard to tell. After all, consumer spending rose a bit thanks to the stimulus package. But with six million jobs lost since the recession began, that spending will stop soon, unless people find jobs or another stimulus package gets passed.

If investors think that all this saving will eventually lead to mounds of dry powder to be invested in stocks, then now could be a fine time to invest in stocks. But if consumers stop borrowing and keep saving, it could be years before consumer spending increases lead to economic growth.

In that case, the only way to boost stocks would be to build a new economy that derives its growth from investment in growth-producing technologies. I'd like to see that, but there's not much reason to believe such a change is forthcoming.

So all that fiscal prudence could be bad for stocks. But at least people will start relying on themselves to prepare for their retirement. And that's a good thing in the longterm.

Peter Cohan is president of Peter S. Cohan & Associates. He also teaches management at Babson College. His eighth book is You Can't Order Change: Lessons from Jim McNerney's Turnaround at Boeing.


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