Closer Look at Household Balance Sheets

We've maintained for several months now that U.S. consumers were/are on the verge of a significant period of balance sheet rebuilding. Over-leveraged households earning flat real wages would, at some point, have no alternative to a higher savings rate. And, whatever the short term pain for the consumer economy, this can only be judged good and necessary. A higher domestic savings rate is the only alternative to continued dependence on massive capital flows from abroad.

So we were especially interested in John Mauldin's Quarterly Review and Outlook, produced by the team at Hoisington Management. The passage pulled by Maudlin distills the argument nicely:

[C]onsumer spending increases should be approximately zero for the next three years. Further exacerbating the problem is the personal saving rate which declined from 5.2% in the decade of the 1990s to average 1.3% in the last seven years, and now stands at 0.3%. Should declining wealth, rising unemployment and poor economic conditions cause consumers to begin to save and lift the rate back to the 1.3% average of the past seven years, real consumer spending would experience a multi-year contraction.

This is interesting, important stuff. The charts alone are worth a few minutes of your time. Take a look. 

Source

Van R. Hoisington and Lucy H. Hunt, "Quarterly Review and Outlook," John Mauldin's Outside the Box, April 21, 2008

Comments

[Ames Tiedeman]

The American people will always find a way to spend. This I am certain of.

[Malkiel]

"Over-leveraged households earning flat real wages would, at some point, have no alternative to a higher savings rate".

This is a psychological non sequitur--any people I know in "Over-leveraged households earning flat real wages" are simply living paycheck to paycheck. What law of nature or statistical study backs up your supposition that people will change their habits and become savers?

[iThinkBig]

I believe the writer that consumer spending will contract and data shows this occuring at a sharp level in non-essential goods. However, consumers must still spend on necessities which are rapidly rising and eroding disposable income. I don't see consumers saving until housing bottoms and inflation is under control.

Housing bottom looks to me to be Q1 or Q2 of 2009. Inflation is a wild card based on if the U.S. adopts and deploys a massive energy independence movement which would deflate the commodities bubble.

That depends on Washington and mainly new leadership next year, although I won't count President Bush out yet. The man is acting focused after being obtuse and apparently unaware of the real state of the economy for many months. Perhaps he should go in front of the American people to prod Congress but if he wants to deflate the commodities bubble as it appears he is attempting to do, it will only happen if global investors have something to massively invest in America backed by the U.S. Treasury. A viable energy package of alternatives, domestic drilling would be just such a package and this would create millions of jobs in the process. Giving the global consumer what it wants (#1 global demand market is energy #2 is agriculture and supplying both cost effectively go hand in hand) is never a bad business model.

[jozap]

Indeed, if food and energy inflation continue to absorb income in households living from check to check ... what do they have left to save?

[curious cat]

there are as many americans as there are snowflakes. though, i'm pretty sure their circles intersect at wal-mart or sam's or cosco. some spend extra for a cup of coffee, some for a pack of cigarettes, some to wash their cars, some to see movies, some to eat out, some to take a cab, some to buy music or video games, and some to do drugs. they are living paycheck to paycheck because they enjoy their vices. otherwise, they would not work so hard or be in debt. americans have plenty of options.

they can work a few more hours, borrow from their parents or stop feeding the family pet the high priced mix. when they finally stop doing drugs, when they stop buying lottery tickets, when hookers are on every corner and they have no customers, then i'll believe that americans have no way to save. honestly, the number of americans who are vegetarians, have a garden, recycle, make their own tea or coffee, eat at home, do not drink, smoke, do drugs or gamble and still walk to any other location are so few,...

that i have yet to meet another.

[Lilguy]

I have to wonder if consumer spending isn't like beer drinking: 90% of the beer is drunk by 10% of the drinkers.

If so, a small (but significant) portion of our populace will take on virtually all the effects of the recession. I'm thinking it's those underwater and defaulting on mortgages.