Savings Rate Decline Is No Mystery: Americans Are Simply Broke

Includes: SPY
by: Denis Ouellet, CFA

What everybody is missing on the savings rate decline is that consumers are not voluntarily dissaving, they are simply economically strangled and HAVE TO dip into their savings for necessities.

The U.S. economy grew 2.5% in Q3. After gains of +0.4% in Q1 and +1.3% in Q2, one might see momentum in the U.S. economy.

But hold on! Sixty-two percent of Q3’s growth came from the 2.4% increase in real consumer expenditures. How could that happen when real disposable income dropped at a 1.7% annual rate? Much, much lower savings, that’s what happened. The savings rate dropped like a stone in Q3, from 5.3% in June to 3.6% in September, the lowest level of savings since December 2007. Talk about the new normal, deleveraging and frugality!

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Strange Americans! How in the world can they reduce their savings in times like these? Think about that:

  • Employment is barely rising years after the recession.
  • The unemployment rate is over 9%.
  • Some 45 million people are living under the poverty income level.
  • Real wages are declining.
  • Government transfers have been flat for a year.
  • Real disposable income per capita has declined 1.6% since June 2010 and is back at its March 2003 level.
  • House prices keep dropping.
  • Interest rates on savings are negative in real terms.
  • Equity markets are down.
  • Consumer credit is barely rising. In fact it collapsed at a 4.6% annual rate in August.
  • Consumer sentiment is as low as at the depth of the recession.

Strange Americans?

Not so much!

AMERICANS ARE SIMPLY BROKE! They have to use their savings just to buy basic necessities. Consider that in Q3, the best quarter for consumer spending since Q4 2010 and a quarter when, to repeat, Real Disposable Income dropped at a 1.7% annual rate:

  • real expenditures on food were flat but prices rose at a 4.8% annual rate;
  • real expenditures on housing and utilities rose at a 2.9% annual rate;
  • real expenditures on health care rose at a 5.4% annual rate;
  • real expenditures on financial services and insurance rose at a 3.3% annual rate;
  • spending on gasoline rose at a 4.4% annual rate in nominal terms, 27% YoY but prices are +32.7%.

These 5 expenditure categories account for 53.4% of all expenditures. Real expenditures on all other categories, mostly discretionary, increased only 0.4% QoQ in Q3. Noteworthy:

  • real expenditures on motor vehicles declined at a 3.3% annual rate; that followed the 25.5% Q2 collapse;
  • real expenditures on clothing and footwear declined at a 8.4% annual rate.

This is what everybody is missing on the savings rate decline: U.S. consumers are not voluntarily dissaving, they are simply strangled and HAVE TO dip into their savings for necessities.

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Real per capita disposable income has declined 1.4% during the first 9 months of 2011 and is back to its March 2003 level.

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Employment is not recovering, transfer payments have stalled, taxes and fees are rising in most states and cities and inflation, particularly strong on essentials, is nearly 4% overall.

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And the U.S. government is stalled as both Congress and the Senate are entangled in each party’s stubborn ideology.

David Rosenberg:

Friday’s Commerce Department report shows that personal income has declined for three consecutive months — at a 2% annual rate. In the past, such steep drops in that category have been followed, three-quarters of the time, by a recession.

Stagnant wages, plunging consumer confidence, and low expectations for wage growth are a recipe for a dramatic drop in consumer spending in coming months.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.