Personal Income and Spending: Saving is the New Trend (Again) 17 comments
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Today's update on personal income and spending corroborates yesterday's GDP report, which told us clearly that the consumer is wary and is cutting back sharply on consumption.
The smoking gun today is that while disposable personal income rose 0.2% in September, personal consumption spending dropped 0.3%. It's not the first time that income rose and spending slipped in the same month, although it's rare. Indeed, news of a spending decline generally is rare. Until now.
In the current climate, everyone will recognize that lower spending has legs, and that the trend will take a toll on an economy that relies so heavily on it for growth. Meanwhile, let's not assume that income will keep rising in the coming months and quarters, which is far from certain. Yes, a new fiscal stimulus is reportedly coming, but the inclination will be strong to bank another round of checks from the government. No wonder that some policymakers are talking of FDR-type infrastructure projects to bypass consumers in a bid to boost demand in the economy. As for Joe Sixpack's sentiment, much depends on how the labor market fares going forward, and for the moment that outlook isn't encouraging.
On the spending side, last month's drop is the biggest monthly decline in four years. What makes this news so discouraging is that it doesn't yet reflect the deteriorating consumer sentiment for October or the ongoing economic and financial pain that we think is coming for the remainder of this year into 2009. It's hard to imagine that spending reports in the coming months will somehow avoid further deterioration, and that news will weigh heavily on everything from the stock market to employment reports. More immediately, to state what now's surely obvious: the holiday retail season looks set to disappoint.
As we said yesterday, the age of consumption is over, at least as we've known it in recent years and for the foreseeable future. Spending is out, saving is in, and the revival has only just begun. Yes, Virginia, cycles are still alive and kicking.
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This article has 17 comments:
Substantially higher savings will help rebuild a better economy in the future and it will save the dollar.
the gov't and the feds and the world for that matter ,is trying to fix,a finacial crisis,caused by excessive credit ,with more credit, AND people
are going to gobble all that 'debt' [ credit ] up, why should they save,
and most wont be able to anyway, the sytem is set up to break you [me]
ya gotta luv it!!!!!!!!!
Mike McGinley, cutting back on personal spending and increasing savings will help the dollar only in so far as most of what consumers buy is from over seas. However, that type of dollar rally doesn't really help the U.S. because it makes exports more expensive to foreigners. So we export less. What the U.S. really needs is for input costs to fall as compared to input costs in other countries. For instance, labor rates need to fall here relative to the same labor in other countries. Costs related to government regulation and waste disposal need to fall. Additionally, the quality of labor needs to rise. A more educated and willing labor force will mean more productivity. More productivity means the same money buys more labor, and gets more output. Once this happens, investors will send production to the U.S. causing the dollar to rise. Note that Japan has a very high savings rate but its economy is in the doldrums for decades. True, the yen is high, but that hasn't helped them either.
Jolly Rancher
China, Indonesia, India, Brazil and other developing countries are similiar to the US and England during the roaring 20's as the west calls it. Likewise, their stock markets are plunging similar to Dow Jones of the 1929 to 1932 at a faster rate since their stock markets of today are younger or a much lesser part of their populations have direct exposure to their stock markets than the west did in 1929.
The big difference is that the "baby boomers" of the developing countries already exist as of today and a majority of them have or are already entering the workforce.
Who knows more how to "tailor" and sell products to the baby boomers than the US?
It will take time for US companies to do this due to cultural differences. But the biggest baby boomer generation (dwarfing the USs' of 1960s to 90s by a few billions) of all time spent most of their younger years dreaming to become like the americans and will not forego that dream just because america is starting to embrace frugality in face of the current "western" global crises.
They are still young and resilient and hard headed enough in order to surrender to current realities. They were able to have a brief taste of how to become rich and prosperous during the early 2000 to 2007; they are not going to let the western malaise prevent them from pursuing their burning goals in life to live like the americans of the 1980's and the 90's.
1. 70% of GDP is consumption.
2. Banks make money by LENDING, not by people stuffing money (as savings) to the banks. If the banks aggregate get more savings than loans (i.e. Net Savings) It wouldn't know what do to with the extra money! We're not like Japan, who can then carry-trade the extra money over to the USD.
3. In the US, "Federal Reserve Notes" (aka US Dollars), is created when the Fed buys Govt issues debts. Less debt means less money!
This won't be allowed to happen. The govt will increase taxes and get into debt (on behalf of) the people if the savings do occur, so that the net savings rate of the country is still negative.
In the USA, it already has become the twisted economy where debt is the money that make it go around.
You want to see some *real* change in habits? You have to fundamentally change the economic base -- we need to revoke the income tax, as unconstitutional, and let the owners of the money have what it theirs -- the government has no preemptive right on it. Go to funding solely by a consumptive tax and import taxes - that will boost the domestic economy and American jobs!!
When I found out I had a $100/mo credit card payment, I doubled up on it till it was payed off, then I sent the credit card payment to a savings account. It takes some fortitude not to buy the flat screen LED TV, but when the washing machine broke we had money in savings for a new one.
I hate making car payment. So when I paid my first car off I kept making the payments to myself. I drove that car until the wheels fell off and paid cash for the next one! I have to find out what current payments are when I buy a car in order to make sure I have enough saved for the next one.
I recently paid my small farm off. Guess what? You got it, I'm paying mortgage payments to me. Credit card plus car payments plus mortgage payments now amount to $1200/mo savings. If I can do it anyone else can to. It just takes guts to do it in the first place.
Everyone is always running the wrong direction. It would have been prudent to have been saving all this time, instead of tapping home equity and buying SUV's and going vacations.
The fear will in fact, subside, as another poster put it - we're sure of that. Look at our history to see how ignorant and blind to things we become, and how quickly it happens. This next round of inflation will prop up real estate and other commodities, and people will 'feel richer' but then again, a gallon of milk will be $10 as well.
As for stimulus packages, there are two problems.
1. A direct handout to consumers will either get banked or, to the extent it is spent, end up in the pockets of overseas producers (admittedly via some stimulation of domestic retailers, transportation companies, warehouses etc.)
2. Infrastructure expenditure makes more economic sense, particularly in countries such as the US and UK which have some 'deficiencies' in this area. However, whilst I'm no engineer I would have thought the time it would take to plan and mobilise for any meaningful effort would shift the stimulus from resulting cash flows well into the next upturn. In fact, if meaningful infrastructure investments emerge in the next few weeks and months packaged as a stimulus to get us out of our current woes I would have to see this as a tacit government admission that the downturn is going to be deeper and/or longer than many observers currently foresee. (Rubini, Soros, et al excepted, of course.)
People this past year have had to tighten their belts to make up for the exorbitant cost of fuel.The high cost of fuel in turn raised the prices of every consumer product from farming &shipping food, to producing and shipping other products.Electric companies passed on their higher production costs with large rate increases. We have spent less because we had less to spend.We quit eating out as much or at all, quit going to the movies, quit buying new products and only stuck to the bare necessities.Now it is being reported a lot of people have had to stop taking necessary medications because they can't afford them. That in turn has caused job losses. We spent 168 Billion on the last stimulas pkg. That could have gone a long way toward getting us started on the road to energy independence!! Why doesn't our country invest in getting us out of this mess instead of their quick fixes that don't work? I just read a facinating book The Manhattan Project of 2009 by Jeff Wilson. Congress needs to read this book as well!