What's the Biggest Threat to the U.S. Economy?

If you picked savings, go to the head of the class. For 25 years, Americans have been on a collective shopping spree, aided by a historic collapse of the personal-saving rate. In the early 1980s, U.S. consumers saved about 10 percent of their after-tax income; in 2005, the saving rate hit zero. A rapid rebound in savings could be devastating. Consider: Americans spend about $10 trillion a year. A jump in the saving rate to 5 percent would cut that by a massive $500 billion.

It seems strange to fear thrift, usually considered a private and public virtue. People save to buy a home, put kids through college and protect their retirement. By saving, nations lift their living standards through investments in new technologies, and more factories and roads. Still, the collapse of personal saving has clearly bolstered the economy.

It's served

as an afterburner, as Americans spent more of their incomes or borrowed more. Since 2000, consumer debt, including mortgages, has increased a hefty 82 percent, to $13.4 trillion. The resulting stimulus to production and job creation has largely insulated the economy from repeated setbacks, from the puncturing of the high-tech "bubble," to higher gasoline prices, to big hedge-fund failures (Long-Term Capital Management in 1998; Amaranth in 2006) and the current housing slump.

But could there now be a reckoning? Could the afterburner become a drag chute? Americans have spent and borrowed against huge increases in housing and stock-market values, and despite swollen debts their net worth (assets minus debts) has actually risen. These wealth increases have substituted for annual saving, but they may now be abating. At about $11 trillion, household stock-market wealth is roughly what it was at the end of 2000. At about $21 trillion, real-estate wealth has nearly doubled, but home prices are now flattening or dropping. Lax credit standards ("subprime" mortgages) and low interest rates also contributed to consumers' recent borrowing surge. Both are now ending.

Put it all together, and tireless American shoppers may be tiring. They may feel impelled to save more and buy less, especially as aging baby boomers contemplate their retirement. Consumer debt burdens—monthly interest and principal payments—now exceed 14 percent of disposable income, near a historic high. Interestingly, most economists seem unperturbed. They discount the danger of a big shift in consumer spending and saving. But then again, most economists didn't anticipate the earlier fall in personal saving. Maybe they're right this time; if not, watch out.