'Clunkers' Spending Siphons Savings

In August, personal income rose by $19.3 billion, or 0.2%, and disposable personal income (or DPI, essentially after-tax income) rose by $15.5 billion, or 0.1%. The increase in personal income is essentially the same as we saw in July, and in line with consensus expectations.

DPI was actually down very slightly in July, so even the 0.1% increase is an improvement. Even though inflation is low, DPI is not keeping up with it. In real terms, DPI is down for three months in a row, having fallen 0.2% in August, 0.1% in July and plunging 1.6% in June.

Income from wages and salaries rose by $8.5 billion in August -- almost the same as the $8.6 billion increase in July -- however there was a big difference by sector. Service sector wages soared by $14.0 billion in August, a big increase from the $7.9 billion addition in July. Goods producers did not fare as well, with wages falling by $5.5 billion in August -- more than reversing the $0.7 billion gain in July. Within goods producing, the big swing was within manufacturing, where wages dropped $3.3 billion in August following a $4.4 billion gain in July.

While income was essentially stagnant, consumer spending (PCE) soared by $129.6 billion or 1.3%. This follows a 0.3% increase in July, or $25.2 billion. Real PCE -- PCE adjusted for inflation -- increased 0.9 percent in August, compared with an increase of 0.2 percent in July.

Purchases of durable goods increased 5.8 percent, compared with an increase of 1.8 percent. Purchases of Autos, in response to the "Cash for Clunkers" program, accounted for most of the August increase in purchases of durable goods, and more than accounted for the July increase.

If incomes are flat or rising slowly and spending jumps, it means that people are either drawing down on savings or going into debt. As far as these statistics are concerned, it doesn’t matter which.

The Cash for Clunkers program “succeeded” in getting the savings rate to come back down. In the short term, that is a good thing and has helped breath some new life into the economy. It was certainly good for Ford (F), CarMax (KMX) and Auto Nation (AN).

In the long term, however, this is a disaster. In August, personal savings (DPI minus PCE) was 324.1 billion or a rate of just 3.0%, down from $436.0 billion or 4.0% in July.

Our low savings rate and excessive dependence on consumer spending to power the economy is one of the key reasons the economy is in the mess it is in. It forces us to get the savings needed to invest in this country from abroad. It causes the trade deficit to soar. We end up buying goods from abroad rather than from domestic sources, and thus don’t see a lot of wage and salary income from manufacturing workers.

The graph below shows the path of the savings rate over the last fifty years. You can see that recently the savings rate has become very erratic (it is actually even more erratic than it looks since the graph uses a 3-month average to smooth things out) and while off the lows of recent years is still extremely low from a historical perspective.

A declining savings rate helps boost the economy, but a very low savings rate is unsustainable and eats away at the very core of its structure. It is sort of like eating your seed corn -- you enjoy it while you are feasting, but the next year you have a much smaller harvest. This country has been progressively eating more and more of its seed corn over the past 30 years or so.

As we try to replenish the seed, it means we have to eat less of the corn today so we can plant more for next year’s harvest. America will have to go on a diet -- but also not starve to death -- as we rebuild our seed stock.

Savings rates do tend to rise in recessions, but we need to get the savings rate back up to the 8 to 10% that was the norm in the 1960’s and 1970’s to restore the health of the economy for the long term. That means that consumption will have to become a much smaller part of the overall economy, and we will have to invest and export more. However, businesses are not likely to invest much if the consumer demand is not there. We will probably also have to see Government spending become a bigger part of the economy.

To paraphrase St. Augustine, “Lord, make us thrifty…but not yet.” The decline in the savings rate in August is going to be a big part of the reason why GDP in the third quarter will actually be positive -- perhaps by as much as 2.5% or 3.0%. However, that increase is coming at the expense of the progress we had been making in redressing one of the most important fundamental structural imbalances in our economy.

A long, slow, persistent rise in the savings rate is probably the best we can hope for -- one that results in positive growth, although slower growth than has been seen after most recessions.

Comments

[Mad Hedge F...:]

ert Was that nice for you, dear? Now that cash for clunkers has expired, new car sales have cratered. September is coming in at a 7 million unit run rate, lower than before the program started, and down 24% from already depressed YOY levels. It really makes you wonder what will happen when the other government stimulus programs run out. The $8,000 tax credit for first time home buyers ends November 30, and unless you have a deal in contract, the program is effectively over. That is thought to be behind the recent weakness in new home sales, the biggest beneficiaries of the program. Is this the beginning of the “square root,” or the “W.”

Oct 01 12:17 PM

[ETFdesk.com:]

nothing more than a 1 month blip due to Clunkers. Savings rate will increase signficantly as consumer continue to delever.

Oct 01 02:56 PM

[Shishir Nigam:]

A higher savings rate in the coming months and more retrenched consumer spending would show that the cash for clunkers really brought forward future spending much more than initiating new spending that otherwise wouldn't have occured.

The cash-for-clunkers program was ultimately a massive subsidy to the american auto market which will find it hard to survive in the future anyway. More good money going after bad investments. The manufacturing indices have already come in below expectations today, lower than normal auto purchases in the future is not going to help that at all.

Wasn't there a time when the US used to be the free-market activist of the world? It seems a very long time ago.

For more analysis, check out my blog: youngandinvested.com

Oct 01 04:22 PM

[Lsente:]

C4C hangover aside, the true pulse of this article was the end of this credit cycle. Inflation/deflation, the argument is an extension of the beginning of a new secular shift in consumer spending.

Metals, Euros, equities, commodities are all looking important right now (recovery paradigm the Fed has mentioned previously). For any one to claim importance over the other, so early in the cycle shift is pretty ignorant and one of my issues in the comment streams.

If LIQUIDITY/risk averesion become important, we'll see a momentary shift into USD and this ebb/flow will probably be part of this transition process. So for the love of any deity of your choosing, stay nimble and use this cheap risk environment to your advantage.

Oct 01 05:19 PM

[Windsun33:]

More proof that all these politically motivated stimulous things simply do not work in the long term. Not only did it add some $40 billion to the deficit, it also reduced savings.

Until the US decides to actually get back to the free market, and gets out of this stupid "too big to fail" mentality, it will only extend the time it takes to recover.

Oct 02 12:26 AM

[Moon Kil Woong:]

It doesn't take a brain scientist to figure out the long term results of cash for clunkers. We will be grousing about the cratered car industry sales for the next 6 months. Now lets look at the end to the $8,000 buy a house incentive.

No wonder the government feels compelled to dump billions of stimulus money into the market in 2010. If they are lucky it will help negate the hangover from their 2009 stimulus.

Don't ask about 2011 because the government doesn't want to tell you.

Oct 02 02:11 AM

[Josh Dowlut:]

Good seed corn analogy.

What I find confounding about the program is that it actually wasted energy (I wrote a blog on here explaining how, basically it takes about as much energy to manufacture a car as the car's total lifetime fuel consumption) and I've found myself needing to explain and argue the seemingly no-braineringly obvious point that destroying stuff that works is not the path to prosperity. Maybe it's because I'm a car guy, maybe it's because I get a real emotional attachment to my cars as if they were living, but executing working cars deeply disturbed me.

Oct 02 04:09 AM

[I am not a ...:]

i note your comments and while it has been said before lots of times,it doesn't appear to have been heard by the keynsian Prophets of the 21st Century ,those who would rather you spend money to make them look good ,rather than make do with old clothes,no cell phone, a normal TV with VCR and transistor radio on top of the 15 year refrigerator that carried home behind your 1980 mercedes/volvo /toyota etc . :-)


On Oct 02 04:09 AM Josh Dowlut wrote:

> Good seed corn analogy.
>
> What I find confounding about the program is that it actually wasted
> energy (I wrote a blog on here explaining how, basically it takes
> about as much energy to manufacture a car as the car's total lifetime
> fuel consumption) and I've found myself needing to explain and argue
> the seemingly no-braineringly obvious point that destroying stuff
> that works is not the path to prosperity. Maybe it's because I'm
> a car guy, maybe it's because I get a real emotional attachment to
> my cars as if they were living, but executing working cars deeply
> disturbed me.

Oct 02 09:23 AM

[John Bowman:]

If the U6 unemployment rate of nearly 17% is accurate, how can those people contribute to an increasing savings rate? I would imagine that it would bring the average savings rate persistently downward,

Oct 02 09:44 AM

[swaps:]

Like Pavlov's dog, consumers were conditoned to spend, spend, spend. Me included. Eighty-four percent of the nation is still not experiencing a Great Depression as are the jobless 16 percent.

Maybe a high percentage of the still employed are still spending in hopes the Depression will not spread to them. They have been mentally conditioned with the mantra that spending is good. Spending keeps the system working. Spending now may keep them employed tomorrow.

Only when the money runs out do we become mentally conditoned to cut back and save....and then it is too late.

Strange that the government says it is trying to stimulate spending - then turns around and freezes Social Security recipients, who as a group always needs more money to spend. The government cliams it has to cut SS because it needs to save money. See, the government is following your advice and cutting back and "saving"., (Even though the government could bypass the Fed and just print entitlement money without borrowing it and having to be stuck with interest.)

We can all see how muddled the picture really is. If savings is so important the first item to be chopped from the spending plan was bank bailout program, which has merely saved Wall Street but done little to stimulate Main Street, where the jobs are created.

Wall Street will have to save more to close the savings gap. Every dollar Wall Street saves can be leveraged tenfold for lending. So Wall Streets better not buy yachts or bargains in the Hamptons.

Oct 02 10:41 AM

[1uncle:]

Seems like this would have been expected. It helped demo special interest groups. Cuts in taxes and government spending is what was needed. We got government waste instead.

Oct 02 11:24 AM

[Buckoux:]

As opposed to a "rocket surgeon"?

Sorry, no offense meant. My wife was born in another country and she makes similar modifications to American English when hurried or excited. These linguistic accidents are understandable to the tolerant and are actually endearing. I hope you're not offended. Just a little light humor on an October Friday discussing the stock market where Fridays ( or is it Monday's?) tend to get "dark".


On Oct 02 02:11 AM Moon Kil Woong wrote:

> It doesn't take a brain scientist to figure out the long term results
> of cash for clunkers.

Oct 02 02:24 PM

[ldgregg:]

Good piece and analysis of the savings issue. My comments...

1) On savings: With interest rates so low, there is no incentive to put money into savings and the Market is still too unstable for the average investor. Thus, when there's a deal like "Cash for Clunkers" out there, consumers react. I know a number of unemployed folks who actually pulled money from savings to go buy new cars under the program. Now, that's confidence in a job market rebound! Another reason for low savings rate is the unemployment rate. The unemployed aren't exactly in a position to do much saving as it stands today. Although a general tax break tied to savings contributions would be a good move. Even if you were living off unemployment, you still need to pay tax on it, but if you had the opportunity to swing some of those tax dollars into an IRA, you'd do it (pay yourself vs. pay it in tax). The idea is to open up the IRA contribution tax deduction to anyone (eliminate current limitations). Our government leaders and financial experts need to come together on some creative thinking and fast!

2) On consumer spending: As consumers cut back on spending, they turn to discount stores and 'big box' retailers for deals. Note Wal-Mart's sales are holding strong and I venture to guess that over 70% of their merchandise originates from outside the US (with around 90% of those imports from China). We could really use a national marketing campaign -- like Lee Iacocca pitching us to "Buy American!". I say that only half jokingly, because if you take a historical view of such campaigns (1978, 1992), they were effective in positively impacting the US economy. Specifically, 'Buy American' campaigns of 1978 and 1992 targeted Japanese car companies (which in 1978 began eating a big chunk of the US car-maker's lunch). The end result of the campaign didn't necessarily achieve the big goal of getting consumers to buy more American cars. Rather, it pushed Japanese car makers into building more of their cars in North America, boosting manufacturing in the US, providng new jobs. In 1978, foreign car makers built none of the cars sold in America in America. By 1992, Japanese-owned car makers were building 40% of cars sold in the US in the US. My point here is that we need to take action to retain more of our DPI here in the US. It's all about cash flow. If it's all flowing out, pretty soon, there's nothing left here. And, I'm not just talking about our handing over the the low-end consumer goods marke to Chinat. China is starting to eat our lunch on high tech stuff, too. This said, I've probably raised a healthy debate on the China trade deficit here, but this global economy is a pretty complex thing! Check this out: www.tnr.com/blog/the-a...

Oct 02 04:38 PM

[Swiftcreek1:]

There is nothing wrong with spending.....The problems arise when people leverage themselves to the hilt buying "stuff" on credit.....

The analogy I like to use is the guy who goes out and spends $1000 on the LCD TV and puts it on a credit card then makes the minimum monthly payments until it's paid off.....4 (or more) years later he's paid $4,000 for something that he could have paid cash for if he had just saved for it for a few months.

I have all the same toys my firends do, mine might be a few years older, or not quite as flashy, but they are paid for.....It took me 4 years to save the money to pay cash for my Shelby Mustang....(My original intent was the hottest GT I could buy.)

My point is that I live a good life on about half of what some of my friends make, precisely BECAUSE I don't take on debt.....

Like most people during this recession I do worry about my job, but I don't worry about losing my home, my vehicles, or my credit rating due to circumstances beyond my control.....

.....and.....Amazingly enough I can actually choose to "not participate" in the recession and buy things I want precisely BECAUSE I'm NOT saddled with a bunch of unnecessary debt.


On Oct 02 10:41 AM swaps wrote:

> Like Pavlov's dog, consumers were conditoned to spend, spend, spend.
> Me included. Eighty-four percent of the nation is still not experiencing
> a Great Depression as are the jobless 16 percent.
>
> Maybe a high percentage of the still employed are still spending
> in hopes the Depression will not spread to them. They have been mentally
> conditioned with the mantra that spending is good. Spending keeps
> the system working. Spending now may keep them employed tomorrow.
>
>
> Only when the money runs out do we become mentally conditoned to
> cut back and save....and then it is too late.
>
> Strange that the government says it is trying to stimulate spending
> - then turns around and freezes Social Security recipients, who as
> a group always needs more money to spend. The government cliams it
> has to cut SS because it needs to save money. See, the government
> is following your advice and cutting back and "saving"., (Even though
> the government could bypass the Fed and just print entitlement money
> without borrowing it and having to be stuck with interest.)
>
> We can all see how muddled the picture really is. If savings is so
> important the first item to be chopped from the spending plan was
> bank bailout program, which has merely saved Wall Street but done
> little to stimulate Main Street, where the jobs are created.
>
> Wall Street will have to save more to close the savings gap. Every
> dollar Wall Street saves can be leveraged tenfold for lending. So
> Wall Streets better not buy yachts or bargains in the Hamptons.

Oct 02 11:09 PM

[nukldrager:]

That's Karl Marx LOL

Oct 03 12:30 AM

[ashadu:]

saving today is paying off yesterdays debt. why would anyone want to store money for the future that the rats are eating dayly? the key to spending and saving is finding something worthwhile to buy now or in the future.

Oct 03 07:53 PM

[Aces003:]

Put your money on the repo companies. Many consumers bought foreign made cars with borrowed money thinking it would stimulate the economy. It did, but in Korea and Japan. They are losing their jobs as I type this. When the banks and credit companies get these cars back next year they will look again to Uncle to bail them out.

Oct 04 11:37 PM

[zmr1234:]

How can we in the USA dig ourselves out of an economic hole when every shovelful comes from another location and is then "imported" (i.e. dumped) into the hole we are attempting to dig ourselves out of?

Once upon a time the USA could dig itself out of economic holes because the factories that produced things were located in the USA and inventory replenishment meant adding workers. We don't have a base economy in the USA except for the Wall St. financialists who play games with capital for their own self enrichment (and sometimes based on scam) and a service economy based upon scratching each others' backs.

We can thank our best government money can buy for selling out US workers via one way trade pacts intended break US unions and enrich disloyal multi-national corporations.

Oct 06 11:30 PM