Savings Rates Surge: Who Is Going to Consume?

Our long-held prediction of the American savings rate being forced upward not out of choice but necessity is happening much faster than even I anticipated. There are many flaws with how savings are measured, however, these flaws have not changed over the past few years, so it's apples to apples to compare savings rate "today" versus "3 years ago". In December I penned (ok, I typed) a piece [Dec 29, 2008: What Happens if America Returns to a Historical Savings Rate?] - I had written in many pieces in 2007 and 2008 that Americans would be forced into savings, but I wanted to see the actual numbers and compare them to other countries as well as to the US itself in previous periods.

A lot of the focus of the punditry is when we'll recover. Personally, I think it's a bit of a moot point. What I'm thinking through is not when, but what the recovery will be in America. I posted many of my thoughts in [The US Economic "Recovery"], but essentially a lot of cross currents are forming which should make for a very interesting 5, 10, and indeed 20 years ahead.

Much of the current recovery thesis is based on (a) government spending replacing private enterprise and (b) coaxing Americans back to their old habits. But I'd like to ask what are "old habits?" - most of us in our 20s, 30s and 40s know one reality; our context of history is very different than one who has a longer precedent to view. So let's take a few steps back and I will give you some insight on why I think we're not going to be going back to the binge we've just left for a long time

I'd like to present the graph below which shows the historical saving rate of Americans since the 1960s. (click to enlarge)

As you can see, Americans used to save. They used to act quite near our European and Asian friends

People keep asking when Americans will go back to their old ways, as if saving 0% or 2% is our old ways. Not really - that's our most recent ways. As Uncle Ben Bernanke sits here and destroys American savers (just imagine the 65+ crowd trying to live on these CD interest rates), the master plan is to return Americans to spenders so we can kick the can down the road. But what if Americans do what is best for themselves (save) and not for the "service based economy" (spend like drunken sailors)?

A 10% savings rate? Could it be possible? What would that translate to in real dollars?

We have about a $13 Trillion economy, with about $10 Trillion in private spending. (one could quibble the exact number, but it's within a degree of that and $10 T makes for a nice round number). A 10% savings rate very easily translates $1 Trillion in savings. A 8% savings rate translates to $800 Billion. Even a 5% savings rate translates to $500 Billion. All these numbers exceed the next stimulus plan on an annual basis, which means all the government would do is borrow from our grandchildren, layer more debt on them (that we need to eventually pay) to offset money from our "old economy model" (of the past 6-8 years) as Americans, in self preservation, move to the real "old economy model" (of the past 40 years).

If I am correct, consumer discretionary items will continue to suffer far deeper and longer than the pundits and hedge fund thesis algorithms currently posit. I do not believe these pundits and PhD programmers at hedge funds understand the median wage in America is about $30K (meaning half make less). Many declaring impending recoveries probably make this wage in a month. It is 2 Americas, and the punditry does not live on Main Street. Unfortunately the non punditry portion of 2 Americas needs to drive this economy. If I am correct, my bearishness for retailers (non-grocery, non-essential) will last much longer than those who run up said stocks on "early cycle" thesis - as they will do repeatedly in 2009 (as they have done prematurely multiple times in 2008).

The case against me? Within 6-12 months, companies suddenly decide 6-8% wage increases are the new 3%. Or the US consumer will be back to their overspending ways and the small rebound in savings rate (2%ish) will retrace back to 0% or negative.

So what has happened since late 2008? The US Savings rate has now surged to nearly 7%. That's remarkable. Granted SOME of this is due to government handouts; so many of our economic reports are now buoyed by borrowing from the future (or China) and throwing it in the system today. So "spending" is pushed upward because government is handing out money like no tomorrow, and so is "saving". That said, I do think the underlying trend of saving is accurate - but the exact number is very debatable.

• Households pushed their savings rate to the highest level in more than 15 years in May as a big boost in incomes from the government's stimulus program was devoted more to bolstering nest eggs than increased spending.
• The higher savings rate is healthy in the long term, economists said. But without vigorous consumer spending, the government may have to do more to revive the economy, possibly through further tax breaks and spending. (which we don't have the money to do - more money trees to chop!)
• The Commerce Department said Friday that consumer spending rose 0.3 percent in May, in line with expectations. But incomes jumped 1.4 percent, the biggest gain in a year and easily outpacing the 0.3 percent increase that economists expected. (we see in our monthly employment report that wage inflation is almost non-existent - so where are the income gains coming from? Government largess) The income increase reflected temporary factors relating to the $787 billion economic stimulus program that President Barack Obama pushed through Congress in February to fight the recession. That program included one-time payments to people receiving Social Security and other government pension benefits.
• The savings rate, which was hovering near zero in early 2008, surged to 6.9 percent, the highest level since December 1993.

Here is the reality before the "green shoots" crowd screams about rising incomes.

• The stimulus package also featured reductions in payroll tax withholding designed to get people to start spending more money and boost the economy. Those factors helped increase after-tax incomes 1.6 percent in May. However, without the special factors, after-tax incomes would have risen just 0.2 percent.

This increased savings is a great thing for America in the long term, but an awful one in the near term. This one-time adjustment to get us back to a normal savings rate is a necessity, and the transition period will be very difficult, since so much of our economy is built on consumption. But it shows Americans taking protective action to preserve themselves despite all the incentives from government to get them spending and back into terrible financial straits (if you don't shop, the terrorists have won!)... finally seeing the light. This, I applaud.

So here is the quandary; as I wrote above, if Americans go to a 8% savings rate, that is about $800Billion out of our consumption economy. Which is about how much the stimulus plan is. So for a few years, if the government wants to keep the economic engine humming, it's going to have to keep repeating these massive spring stimulus plans. With money we don't have.

1. Spring 2008- Bush $200B
2. Spring 2009 - Obama $800B
3. Spring 2010 - Obama (it's coming folks, trust me - it's an election year and with unemployment over 10% the honeymoon with Obama will be over)
4. Spring 2011 - We're gonna need another one if you Americans insist on acting rationally and saving 8% of your income
5. Spring 2012 - Call the Chinese! We need more money to support this economy based on shopping

You get the picture. This is what happens when you get rid of production and transition to the new wave, finance based - shopping economy. You face a problem when your citizens don't have house ATMs and decide to start balancing their checkbooks.

Thankfully, by Spring 2013, the housing market should have bottomed in 2011-2012 and the house ATM will be turned back on. Regulation we put in place now will have been snipped away by the lobbyists, and if we are really lucky 0% mortgage teaser rates will return. Then we can start this party all over again. Yippee - "prosperity" will be back.

But my gosh, you folks running into consumer discretionary "early cycle" stocks really need to throw away the old playbook and realize this is a secular change in our history. And with the forces of globalization wracking our system (pressuring wages), while inflation is on the horizon in the decade to come... this is not a 6 month trend. This is a sea change. The US consumer is being forced to act rationale and rebuild his balance sheet. This will take many years - the market has yet to recognize it. This "recovery" is going to be very different than "the playbook". Folks, it is so bad even teenagers are acting responsibly! [Jul 5, 2008: Bloomberg: Teenagers Skip $50 Jeans in Squeeze of Gas, Job Shortage]

[May 10, 2009: NYT - Shift to Savings May be Downturn's Lasting Impact]

[Feb 2, 2009: NYT - Our Love Affair with Malls is on the Rocks]

[Sep 20, 2008: US News & World Report - The End of the Shopaholic Nation?]

Comments

[nobby73:]

So, the problems arose from spending money we don't have for things we don't need and the solution is the government spends money we don't have, on our behalf...

It does not really matter who spends the money, if society does not have the wealth, the books don't balance.

Jun 29 06:07 AM

[Dave Wrixon:]

Agree with all of that but I feel that you have missed out the impact that debasing the dollar will have on household finances. Imported items are about to get a lot more expensive. Some of these might be regarded as essentials. This external inflationary force is going to place a lot more pressure on domestic finances. Even Bernanke cannot allow a situation where Price Inflation is merely compensated by Wage Inflation, even if the employers could afford to stump up.

Jun 29 06:20 AM

[Carlos Lam:]

Mark, as usual, excellent piece! I, for one, have been amazed at the jump in savings rates in such a short time. Before, I can praise my fellow Americans for doing the correct thing, though, I want to see if the trend continues for a while. My fear is that savings rates rise out of fear yet fall when Americans let their guard down and get used to the "new normal." If we are consistently saving 7% or so during the next three years, then I'll be satisfied that a lasting trend has developed.

Jun 29 06:35 AM

[Dave Wrixon:]

Hmmm, how much of this is down to a genuine change of attitude rather than simply the lack of availability of credit?


On Jun 29 06:35 AM Carlos Lam wrote:

> Mark, as usual, excellent piece! I, for one, have been amazed at
> the jump in savings rates in such a short time. Before, I can praise
> my fellow Americans for doing the correct thing, though, I want to
> see if the trend continues for a while. My fear is that savings rates
> rise out of fear yet fall when Americans let their guard down and
> get used to the "new normal." If we are consistently saving 7% or
> so during the next three years, then I'll be satisfied that a lasting
> trend has developed.

Jun 29 07:29 AM

[doubleguns:]

Mark, how does the formula used to calculate savings handle purchases of precious metals? I have often wondered if the banking industry refers to gold as an "ancient relic" do they not include it or silver into their savings formula?

My concern is that if they do not include it, our savings rate could be a bit higher.

Jun 29 08:06 AM

[basehitz:]

Who's going to consume you ask. Apparently, Bazooka Ben. The same guy who expects to jam interest rates artificiially low. However, just as the bond market has other ideas, it seems the consumer is also smarter than our federal government. I have been saying for some time now that to revert back to our old savings of decades past and living within our means will in time repair our collective balance sheets is a real cure for what our ails us.

Memo to Bazooka Ben. . . watch us sheeple. We get it. When will you?

Jun 29 08:22 AM

[User 353732:]

The traditional American Way( pre the Me -generation) was for parents and grandparents to save and sacrifice to underwrite a better life for their children and grandchildren. Grownups denied themselves instant material gratification to invest in children and by doing so invested in America, driving decades of healthy capital formation in the US economy, which made real things for real people and created real value for workers, savers and investors. Saving(ie self control and restraint of whim) was both a moral and an economic decision and it served families, businesses and society very well.
After a generation spent in the wilderness of fantasy, delusion and obsession with consumption( as typified by the cultural formulas of: I am what I buy: I am what I own: I am what I consume), a measure of reality and even sanity seems to be returning to millions(still a distinct minority) of grown up Americans. This displeases our Government and the MSM greatly.
The Government wants to encourage(even coerce) self indulgent consumption, gratuitious materialism and gross financial irresponsibility at every level of society from the individual to the family to the corporation,to the municipality to the state to the Nation.
The New American Way , according to our political and media rulers is for parents and grandparents to steal from our children, grandchildren and descendants yet to be born and by so doing underwrite a worse life for them. The new Way is to sneer at the past, overconsume in the present and rob from the future.
What great nation in history was ever built on this model?

Jun 29 08:32 AM

[Whippet:]

Nice article, Mark- I'm sure even as you wrote it you were conflicted with how crazy it is to be slapping down a 8-10% savings rate as a "bad" thing for our economy. Geez, if you contribute to an employer sponsored 401k plan and SPENDING EVERY OTHER DOLLAR YOU MAKE, you're already saving 7-10%. The fact is, we've been used to using Asian export economies' money as our own surrogate "savings" for far too long. We buy a TV, and they immediately return the money to us as a loan. All those trillions in trade deficits never left America; they are still sitting here in interest-bearing Treasuries and money markets, becoming the basis of the Asian exporters' currencies and Sovereign Wealth Funds. When we stop paying them Tuesday for a Flat Plasma Screen today, as you surmise, the whole Ponzi of "Bretton Woods II" will collapse.
If you explained this to a child, they wouldn't believe it. Fairy tales are easier to believe in than our current reality.

Jun 29 09:01 AM

[pungent:]

Excellent article. I, too, believe that the new normal is not a short term phenomenon.

Jun 29 09:33 AM

[markfl:]

"If I am correct, consumer discretionary items will continue to suffer far deeper and longer than the pundits and hedge fund thesis algorithms currently posit. I do not believe these pundits and PhD programmers at hedge funds understand the median wage in America is about $30K (meaning half make less)."

Correct. Remember 1993? Welfare reform. Job training, job training, etc. It worked for 6 years. Then, in 1999, wages for those with 2-4 years post-secondary education stagnated and stayed that way. After 2002, GDP and productivity grew but wages did not. The housing bubble burst when home prices vastly outpaced both incomes and the ability to borrow. People did not save because they lacked discretionary income.

Consumer spending contracts because wages aren't there and unsecured credit and home equity don't ofset the gap. If Bernanke or Geitner turn off the stimulus, aggregate demand will tank and the economy will double-dip. What would've happened if Greenspan turned off the printing press in 2003? No housing bubble. True. 6 years of stagnant GDP. No job growth. We don't have the bubble band aid anymore. Now we get to re-live 2002-2004 over again, only this time without the home equity ATM.

Jun 29 10:44 AM

[AndrewBaker:]

Firstly, I'd like to quote Puru Saxena of Hong Kong, China, who said:

"Most people seem to forget that these fiscal spending programs aren't creating any real wealth and are simply transferring wealth from the savers to the debtors. Essentially, governments are taking money from the solvent and re-distributing these funds amongst the insolvent."

I picked this comment up on another financial web-site, and am pleased to allow readers here to see it, because it states in a few short words just what all these financial rescue programs are about. In themselves they do nothing, but in doing nothing they burdon the sensible solvent savers and give free reign to the foolish insolvent spendthrifts.

So, the savers will be the same people who did before, only more so; and the spenders from before will be the consumers, only encouraged to borrow and spend even more: with the inevitable result that somewhere down the line we will be in the same state again, only next time it will be far worse.

I hope we find another way before it is too late.

Jun 29 12:36 PM

[conceptwizard:]

It certainly is a good idea for consumers to get out of debt. But the media are treating this diversion of income as if it were a sign of confidence that the recession may be ending and Mr. Obama’s “stimulus” plan working. The Wall Street Journal reported that Social Security recipients of one-time government payments “seem unwilling to spend right away," while The New York Times wrote that “many people were putting that money away instead of spending it.” It is as if people can afford to save more.

The reality is that most consumers have little real choice but to pay. Unable to borrow more as banks cut back credit lines, their “choice” is either to pay their mortgage and credit card bill each month, or lose their homes and see their credit ratings slashed, pushing up penalty interest rates near 20%! To avoid this fate, families are shifting to cheaper (and less nutritious) foods, eating out less (or at fast food restaurants), and cutting back vacation spending. It therefore seems contradictory to applaud these “saving” (that is, debt-repayment) statistics as an indication that the economy may emerge from depression in the next few months. While unemployment approaches the 10% rate and new layoffs are being announced every week, isn’t the Obama administration taking a big risk in telling voters that its stimulus plan is working? What will people think this winter when markets continue to shrink? How thick is Mr. Obama’s Teflon?

This 6.9% is not what most people think of as savings. It is not money in the bank to draw out on the “rainy day” when one is laid off as unemployment rates rise. The statistic means that 6.9% of national income is being earmarked to pay down debt – the highest saving rate in 15 years, up from actually negative rates (living on borrowed credit) just a few years ago. The only way in which these savings are “money in the bank” is that they are being paid by consumers to their banks and credit card companies.

Jun 29 01:12 PM

[igggy:]

I find the Japan savings downtrend surprising and disturbing if that's our future in 10 years. I suspect they are so much 'poorer' they can't save much anymore.

Jun 29 01:54 PM

[Gregman2:]

"...without the special factors, after-tax incomes would have risen just 0.2 percent." Decline of real wages may be the culprit in America's falling savings rate since the early 80s. It may be tied to offshoring.

Jun 29 02:43 PM

[User 142738:]

"Savings," in the absolute simplest terms used by the Fed, is income minus expenditures. This excludes investments (even in savings bonds) and any debt payments, which would merely be lowering debt in exchange for raising equity. (Assets equal liabilities minus equity.)

If savings was defined as raising equity then the savings rate wouldn't have been zero since people were borrowing money to buy houses and stocks that were appreciating in value faster than the debt was appreciating in value.

Jun 29 11:15 PM

[Ted Hurlbut:]

It seems to me that this comes back to the eternal demand-side/supply-side debate. I've always felt demand-side stimulus works ok in the short term but can't sustain long term growth, whereas supply-side stimulus takes longer to unfold but leads to greater innovation and sustained growth. An increase in the savings rate obviously reduces short-term demand, but creates a pool of capital for longer term innovation and investment. Thus, from a stock-picking perspective, including retail stocks, the question becomes whether you're investing with a long or short horizon.

Jul 01 03:05 PM