The Personal Savings Wildcard

Excerpt from Raymond James Economist Dr. Scott Brown's latest economic commentary:

The U.S. economy will recover. Monetary policy and fiscal stimulus should help support growth by the second half of the year. Financial stabilization efforts will be necessary to ensure a lasting recovery – and those are on the way. However, the major wildcard in the economic outlook is the personal savings rate. A higher savings rate is good in the long run. It will provide a better foundation for economic growth. However, in the short-term, increased savings will make the current downturn more severe and longer lasting.

The government does not measure personal savings directly. It is calculated as a residual: income, less taxes and outlays. During annual benchmark revisions, the government’s personal savings figure is often revised significantly (usually higher). However, it’s clear from other measures, such as the Fed’s survey of consumer finances, that households have generally not saved enough on average, and that the savings rate has dropped from where it was in past decades.

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Two factors may be influencing the savings rate in the short-term. One is that consumers are less able to borrow (which is dissavings). The other is that the drop in gasoline prices has freed up some income for savings.

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A trend to higher savings will act as a drag on the economy in the near term, but postponed purchases will raise the prospects for an eventual V-shaped recovery.

Comments

[Tricky:]

This is so overly simplistic that I don't even know where to start the critique.

Mar 03 11:44 AM

[J. D. Swampfox:]

The writer says, "A trend to higher savings will act as a drag on the economy in the near term, but postponed purchases will raise the prospects for an eventual V-shaped recovery." I wonder... the article seems to have an underlying vision of the consumer "white-knuckling it" ---that is, gritting his teeth and holding out as long as he can before succumbing to the unrelenting craving for more consumption. This, along the imagery that durable goods are "fast" wearing out so that replacement will result in this V shaped reversal in spending just as soon as the consumer can stand his old clunker washing machine no longer. This seems like single-entry accounting. The assumption is that the consumer can spend whenever he wants, but that he just "doesn't want to right now". The other side of the T account is expected (fear-weighted) personal income, Looking from that side, the consumer can't spend because he sees his future income falling and won't spend because he senses it's not a good idea until he knows better how far his income will fall. It is not nearly as likely this time, as in 2001, that consumption will not bounce back.

Mar 03 12:05 PM