U.S. Savings Rate Surges Higher: A Shift in Consumer Behavior

Friday's announcement that the US savings rate has hit an annualized 6.9%, the highest in 15 years (albeit boosted by transfer payments), confirms my view that we are seeing a huge cultural shift in US consumer behavior.

One of the mysteries of the slump has been how international trade volumes have collapsed far faster than reported growth would imply, and that would be explained in part if US consumer spending had been even higher in the boom years than officially reported, and thus the retrenchment as cash savings soared has sent shock waves across Asian and European exporters.

Are underlying US personal savings even higher than the 6.9% rate reported for May by the BEA? The circumstantial evidence certainly suggests as much, notably the relative ease with which the Treasury is funding deficits despite a marked loss of foreign interest beyond the very short duration market. The reported personal savings rate would finance a $600bn deficit, plus another $400bn from the corporate sector, leaving about $800bn to be funded by foreign central banks and private buyers.

But if personal savings are already at the levels I forecast last Autumn in the high single digits, it suggests that the pressure to attract foreign capital flows is not as great as markets currently assume. Between 2000 to 2007 US consumer debt grew as much relative to income as in the previous 25 years, and that huge leverage is now being unwound, which will be a key global economic trend in coming years.

Each percentage point on the savings rate translates into about $100bn flowing into the financial system to be invested. I've maintained that a key impact of the crash of 2008 would be to make the US more financially self-sufficient, particularly as the trade deficit evaporated with lower consumer spending. The Bureau of Economic Analysis [BEA] will revise its savings estimate on July31, and given the radical shift in consumer behavior amid historic wealth destruction, I think it's very likely the numbers have understated the scale of rediscovered US thrift (particularly as the BEA is redefining consumer spending categories). At the same time, the BEA also will release revised estimates of the complete set of GDP accounts back to 1998. It makes these massive revisions every five years or so in what it calls a ‘comprehensive revision.’

Economics isn't an objective discipline like engineering or medicine, with strictly observable facts and the means to collect them reliably, as so much data is based on very imprecise inference via survey. That's why the timing of recessions and the economic cycle is subject to huge lags and revisions. These revisions can often substantially rewrite economic history, notably in relation to GDP growth and the savings rate. Come July, we may see things in a very different light.

The implications of a higher savings rate are that the US fiscal deficit should be easier to finance domestically, and that the trade deficit will continue to shrink because consumer spending has fallen even more than thought from the peak and likely to stay there. That is bond and dollar positive, but bad news for Asian exporters in that the slump in trade volumes isn't exaggerated after all, but reflects a permanent and profound shift in US consumer behavior.

Disclosure: None

Comments

[Dave Wrixon:]

Isn't much of this just down to the fact that debt is not being rolled over so for the most part consumers have no real choice? It seems to me that much of this saving which just cancel debt, which will of course have a positive impact on banks reserve ratios, which was probably the whole idea in the first place, but because debt rather than Money as is by the Fed just disappears into the Ether when repaid, it won't have much a stimulating effect on American Industries or on Capital Investment.

Recovery depends on investment in new production that is competitive and relevant to Today's markets. I have to say I am skeptical.

Jun 28 05:28 AM

[DONE_SONZ:]

You'r assuming the fed is going to sit back and let people save.Goodbye ressession,hello depression.Jewlery demand?Wippdy doo.

Jun 28 07:46 AM

[Chief buffalo:]

I am 74 years of age and I can not offer advice to the young except to spend less and save more. There is nothing encouraging coming from this administration to cause them to do otherwise. Everything that comes from this administration is more of share the pain. The very citizens and non-citizens that this administration professes to help are going to suffer more under these policies. Save,Save,Save and try to place the funds in an inflation protection source, for employment is going to get worse and as inventories continue to drop,shortages will occur and food and energy will be the real pain of inflation.

Jun 28 01:37 PM

[Prudent Man...:]

As long as BHO keeps changing the rules of business, laws and taxes few are going to take the risk of investing in capital goods. This also hurts our ability to compete internationally and creates pressure on the smaller business enterprises who cannot afford the staff necessary to keep up with the additional costs.

The Crony Capitalists who have poured millions of dollars into BHO's campaign coffers enjoy for now the lack of entrepreneurial creative competition - for now. When the Progressive Left goes after them will it be too late?

Jun 28 02:24 PM

[jackooo:]

6.9% are saving now! Gotta laugh. They get 1/2% interest on their savings and inflation is above 5%. Great way to save. Hello!!! It is toooo late to save. The only way out of it is to invest.

Jun 29 02:10 PM