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  • Savings rate highest in 15 years 6 comments
    Jun 26, 2009 10:22 AM

    We believe the American consumer is taking the right steps to survive the current crisis - deleverage and increase savings.  Of course, these steps do not help stimulate the consumer spending dependent economy in the short-term; and that's fine with us.  As mentioned in our June 17 article, "The Savings Rate Must Increase", savings rate must increase in order to reduce consumer debt, restore long-term consumer confidence, and provide capital for overall economic growth.

    May's Personal Income and Outlays report, which was published earlier this morning, indicated consumers may be thinking along the same lines.  While personal income increased 1.4%, much higher than expected mainly due to government payouts, personal consumption expenditures (PCE) were only in-line with expectations, at 0.3%, which resulted in a 6.9% savings rate, the highest in 15 years.  We must note that such a high rate is driven by the higher 'government sponsored' income, which we believe (and hope) will not continue.  In fact, wages and salaries (excl. govt. payouts) decreased 10bps for the month.  That decline could have been higher if it were not for a 20bps increase in wages and salaries of government jobs.  Without government assistance, we may have seen a decline in consumption. 

    While we view this morning's report as positive, we believe in order for the economy to benefit from higher savings rate, consumers will have to maintain savings rates above 6% for another 3 - 9 months.  

    On a positive note, higher savings may also drive a potential recovery in the housing market as they can keep inflation and interest rates, therefore mortgage rates, low.  However, we believe this will be more than offset by unemployment in the short to medium term.       

    We continue to expect more savings, minimal growth in consumer spending, therefore a slower turnaround in the GDP, from which the economy and the country will benefit in the long-run.

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This post has 6 comments:

  •  
    Increased savings is indeed a good sign, but the year over year comparisons, ie, "highest savings rate in 15 years" are meaningless. The Department of Commerce radically revamped the calculation in 2007, basically adding around 2.5% to the baseline, retroactive to the third quarter of 2005 when things started getting really ugly. I captured the before and after graphs showing the savings rate trend from the Commerce site:

    www.fonerbooks.com/200...

    It wasn't careful planning on my part, I just took forever to finish an article I was working on, and when I went back to get an update graph, they had completely changed the algo.

    Morris
    Jun 26 12:53 PM | Link | Reply
  •  
    Thanks Morris. I'll certainly review that.


    On Jun 26 12:53 PM Morris Rosenthal wrote:

    > Increased savings is indeed a good sign, but the year over year comparisons,
    > ie, "highest savings rate in 15 years" are meaningless. The Department
    > of Commerce radically revamped the calculation in 2007, basically
    > adding around 2.5% to the baseline, retroactive to the third quarter
    > of 2005 when things started getting really ugly. I captured the before
    > and after graphs showing the savings rate trend from the Commerce
    > site:
    >
    > www.fonerbooks.com/200...
    >
    > It wasn't careful planning on my part, I just took forever to finish
    > an article I was working on, and when I went back to get an update
    > graph, they had completely changed the algo.
    >
    > Morris
    Jun 26 02:42 PM | Link | Reply
  •  
    Morris - I spoke with the BEA and they told me revisions take place often as it takes a while for them to get final data from their various source. Until then, they're using proxies. What's changed the last few years is their data providers. They now use a lot more data sources than before. But you're right, those "revisions" are disturbing.


    On Jun 26 12:53 PM Morris Rosenthal wrote:

    > Increased savings is indeed a good sign, but the year over year comparisons,
    > ie, "highest savings rate in 15 years" are meaningless. The Department
    > of Commerce radically revamped the calculation in 2007, basically
    > adding around 2.5% to the baseline, retroactive to the third quarter
    > of 2005 when things started getting really ugly. I captured the before
    > and after graphs showing the savings rate trend from the Commerce
    > site:
    >
    > www.fonerbooks.com/200...
    >
    > It wasn't careful planning on my part, I just took forever to finish
    > an article I was working on, and when I went back to get an update
    > graph, they had completely changed the algo.
    >
    > Morris
    Jun 26 03:35 PM | Link | Reply
  •  
    Ali,

    Great follow up - I believe when I checked with them a couple years ago, they just said the methodology had changed. But as a check, I just went to the Internet Archive and looked at the progression of their graphs over the last five years. It makes me skeptical of the "data source" explanation, the earlier revisions were trivial in comparison. You can view all of these by going to:

    www.archive.org
    and plugging in the BEA page
    www.bea.gov/briefrm/sa...

    then loading up each year. Keep an eye on the lower axis of the graph for dating, because the archive isn't super accurate for dates.

    Morris
    Jun 26 06:03 PM | Link | Reply
  •  
    The Commerce Department is showing an enormous spike in personal savings as we continue with the deleveraging theme. People are not paying down their debt, sitting on cash instead. The 6.9% we hit in May is actually a 50-year average.

    Some are attributing this to the government stimulus spending:
    CNN: "Personal income boosted by stimulus". Except maybe for the increase in unemployment benefits, it's hard to attribute this to anything but uncertainty that's on the minds of the consumer.
    In the long term however, this trend will help repair the severely damaged consumer balance sheet.

    www.SoberLook.com
    Jun 27 01:32 PM | Link | Reply
  •  
    Agreed. We also think savings rate must be higher (seekingalpha.com/artic...). In fact that 50yr avg that you cited would have been higher were it not for basically zero savings this decade.

    Also, I think what we saw in May would've been much higher if we hadn't had the govt payouts. But whatever increase we see, we need to see that at least it can be maintained.
    Jun 28 01:33 PM | Link | Reply
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