U.S. Consumers Are Changing Habits and Lifestyles

You all know that the savings rate in the US is up. What you might not know is that it’s at a 10 year high, as illustrated by the chart below from the BEA via the St. Louis Fed:

The funny thing is that Americans are also taking out 15 year mortgages. The theory is that people will get out of debt faster – NY Times:

More recently, there has been increased activity in another loan alternative: a fixed-rate mortgage with a 15-year term.

Brokers and mortgage industry executives say that these loans are becoming especially popular among people who want to shed debt more quickly, and in light of the current economic atmosphere, that goal is perhaps more widely applicable than ever.

The number of 15-year mortgages issued in February jumped to 74,497 from 42,178 in January, according to First American CoreLogic, a real estate consulting company in San Francisco. And according to Bloomberg News, $15.9 billion worth of 15-year mortgages were issued in March, more than twice the $7.5 billion issued in February.

So the American consumer is actually saving more and paying down debt faster! The US consumer is taking it to the bank!

Is this good news for the markets? Probably not. People only save and refuse to spend when they are afraid and worried about the future of economic prospects. However, I do think it’s a negative issue thing for the dollar.

I am taking bets that by this time next year, economists and market participants will be blaming the US consumer for being frugal and for refusing to take on the excess Chinese and European production.

And if the US consumer refuses to consume like yesteryear, then who will fill the gap? I have no idea, but the logic of many economists is that emerging market consumers will take over.

In any case, the bottom line is that the US consumer is changing habits. He will be more frugal, savings oriented and less debt oriented.

Disclosure - none.

Comments

[Vienna:]

I think it will be good to reduce the spending spree, and hope that the greed attitude changes as well. Furthermore I do not think that anyone will blame the US for not consuming, they where blaming them for negligence and greed, what caused the breakdown.

May 26 09:01 AM

[pockyclips ...:]

Expecting Indian and Chinese middle class consumerism to take over where Americans left off is a pipe dream. These folks average $5 k/year, and even if you assume 1 billion in their middle classes, that makes up about one third of U.S. consumer spending.

May 26 09:24 AM

[jayminho:]

good for them.
darwinism at its best, right ?

face it, the wise living spicies have to flexible enough to re-adjustments and keep surving.

May 26 10:08 AM

[Dirk McCoy:]

The US has a little over 300M people. India and China have over 2.5B. A $500/year/person consumption change in the US only need be met by a $60/year/person consumption change in those two countries alone (and don't forget about the other 3.5B people on the planet). Pipe dream is not the words that come to mind when considering this possibility.

Look for a weakening dollar and resumed inflation (of some things more than others, like oil and foreign-assembled goods) to signal that the world is turning again. When a Chinese laborer earns 1/7 of an American laborer, you're a fool not to think that there will be some kind of move towards an equilibrium now that the Chinese and Indians have joined the global capitalist (and superior) game.

India's inflation rate in 2008 was 12%, and IT companies there have been working to deal with rising labor rates- including moving work to lower cost regions. These will translate into more purchasing power, translating into more consumption.

Free trade capitalism is working. Just tell the Fed not to invert the yield curve and our government not to subsidize poor lifestyle choices so we can continue to benefit...

May 26 11:35 AM

[Donald Ingram:]

"more frugal, savings oriented, less debt oriented."
You forgot spending. Which will be much more discretionary rather than implusive. This tends to be a long term trend when initiated by the consumer. Don't look for the malls to be filled with buyers. Not for a long time to come. Years.
Unfortunately, the actions of the government will erode the savings through inflation. Much lower standard of living coming to most Americans. Can they adjust and accept this? Time will tell.
This will be the last economic crises in which the US dollar is viewed as a safe haven. Ironic. The destruction of the dollar caused by the people themselves, and their inability to spend only what they earn!

May 26 12:13 PM

[Prudent Man...:]

Re: U.S Economy:

Excess capacity = Deflation

Increased Debt and Currency Debasement = High Interest Rate, Crowding Out Business and Increased Unemployment

The Two Together = Stagflation

I don't see anything on the economic and fiscal horizon that will change the variables of this algorithm. If and when they manifest themselves the outlook will change.

May 26 12:56 PM

[RiskReturnO...:]

Suggestion for those interested in understanding more about the new US consumers spending / savings paradigm (and emerging markets consumer behavior) -- listen to a few conference calls or read the transcripts of the latest earnings releases from the key companies that are part of the XLY (consumer discretionary ETF).

My takeaways:

1. US consumers have already made the (sometimes painful) adjustment to their lifestyles by trading down to lower cost good and services that still deliver value to meet their needs. This trade-down is happening on a relative basis across the entire consumer demographic. MCD is doing fine with their McCafe (lower priced than SBUX, yet meeting consumer needs for "feel good luxury"); JWN is doing fine (vs. Saks and Neiman), a trade down for the affluent segment.

2. US Savings rate of 5% will be maintained for a long time, even as incomes start rising and wealth is rebuilt. We don't need savings rate to drop back to 0% to have a healthy consumer economy. As long as we don't get another spike of consumer panic attack (sending savings rate to 10% in one-two months), the US economy can adjust and, more importantly, corporations can adjust by adapting to new products, distribution networks, cost controls, and innovations that suit the new lifestyle (e.g., gardening products doing very well; short vacations to museums doing very well).

3. Emerging market consumers (especially China and India) can make up for lack of growth from US consumers. The lower US consumer spending (from 0% to 5% savings rate) is worth around $500B per year. China's 250MM upper middle class (only counting big 5 cities) making $10K per year can increase spending by $2,000 per year pretty easily as they are seeing rapid income growth and wealth creation. I expect the short fall in US consumer spending to be made up by China in 12-18 months. As long as US spending stays flat, future growth in emerging market spending will lead to global growth. (DIS is increasing investment in China, Russia, India, and Eastern Europe; YUM continues to grow in China)

In summary, monitor performance of XLY carefully, as its core holding are companies that must address the shift in US consumer spending behaviors and optimizing for growth in emerging market consumers.

May 26 12:58 PM

[Carlos Lam:]

With household debt at about 100% of GDP, there's no way American consumers can keep consuming...for now. Before I can believe that Americans' long-term savings rate is going to remain heightened, I want to see more data. I think it's just WAY too optimistic to believe that consumers who bragged about which plasma TV they bought will be turned into thrifty savers; working in the criminal law field doesn't give me a lot of evidence that people change their free-wheeling ways easily. One or two years of 5% in savings does not a trend make.

May 26 11:07 PM

[George Kesa...:]

To be honest, I am also not that optimistic that Americans will change their ways soon. However, I do believe in market forces and if a recession or high debt levels force them to change then that’s good enough for me.

Having said that, I do agree with Carlos Lam that we need to see more data.

I also agree with the points made by RiskReturnOptimizer and also Donald Ingram that the savings rate will be high for many many years.

May 27 02:13 AM

[Hot Richard:]

"D'oh!"
-- Homer Simpson

Savings rates are up! Just in time to be obliterated by inflation!

Americans won't change. Good news for Harley, tobacco, The Gap, Nike, AT&T, Sony and all the other nonsense Americans buy instead of taking care of their savings.

But, that just creates a 100 million or so voters who will buy the snake oil of socialism and marry a nice Senator who passes legislation for wealth redistribution (while the new wife looks the other way and buys a new cell phone).

May 27 10:23 AM

[fireball:]

i don't think there will be much choice for a few years. it looks like we are less than half way through this mess.
it is hard to up savings when unemployed and trying to eat. the frugal lifestyle will last awhile. not so sure about savings growing.

May 27 10:28 AM

[notsosmart:]

too many people have too much stuff.other than groceries or car service how long could you last without going to a store? a while i think.

May 27 03:15 PM