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Personal Savings Rate: What's Going On? Can Spending Drive the Economy

The personal savings rate fell to 2.6% in the 4th quarter. The all-time low rate 2.2% in 2005. What's going on?

The Wall Street Journal says Consumers Can’t Keep Driving the Economy.

Gross domestic product grew at 2.6% annual rate in the fourth quarter, the Commerce Department said Friday. That was slower than the 3.2% it clocked in the third quarter and the 2.9% that economists expected.

A quick look under the hood shows that when it comes to demand, things are doing just fine. Personal spending grew at 3.8% rate, setting its fastest pace in three years, while capital spending growth hit 6.8%. The drags came from companies adding less to their inventories and an expansion in the trade deficit. Really, this just counts as a payback for the third quarter, when inventories and trade boosted growth.

The concern is whether demand will stay strong. Consumer spending has been regularly outpacing income growth and, as a result, people are saving less and less. The personal saving rate (the share of after-tax income that isn’t spent) fell to 2.6% in the fourth quarter from 3.3% in the third quarter. That compared with 6.1% two years earlier and was the lowest level since 2005, when the housing bubble was at its height.

The Journal's conclusion is "without wage increases spending growth will have to slow," and the economy with it.

Mixed Bag

Earlier today, in Weaker Than Expected GDP: Mixed Bag or Worse? I made this claim: "Despite all the crowing about consumer spending, recall that it is occurring only because of an unsustainable drawdown in savings."

An astute reader commented, "Don’t you expect a drop in savings when 10K people earning good money retire each day?"

That's a good point. And it is part of the picture, but only a part of it.

I replied "The other side is rising credit card and auto defaults and Millennials racking up purchases they cannot afford (24% still paying Christmas of 2016). The next set of [Christmas credit card] numbers is guaranteed to be worse."

Note the saving's spike in 2012 to 9.2%.

Were not hoards of boomers retiring then? What's the difference between then and now?

Wealth Effect

The difference between 2012 and now is the wealth effect from a booming stock market.

In 2005, people actually believed their home was their retirement vehicle and prices would rise forever. Today's widespread belief is stock prices only go up. In 2012, many retirees were concerned their stock nest egg would not last long enough.

Retirees can spend at will as long as they believe stock prices will rise more than their yearly needs.

Millennials who have few assets are not in the same boat. Millennials just need to believe they will have a job or alternatively they need to believe "the future is now so who cares?"

Haunting Math

Twilight Zone

Can Spending Drive the Economy?

  • In the case of millennials and those without assets, only as long as income keeps up with payments. Alternatively, only as long as a "What, Me Worry?" attitude persists.
  • In the case of retired boomers living in wealth-effect Fantasyland, only as long as sentiment towards equities lasts.

From a GDP perspective, spending (even government waste) is the economic driver.

More accurately, spending does not drive the economy. Production is the true driver.

Mike "Mish" Shedlock​

What if Trump tax cuts bring the inflation the Fed wants but it swings too far to that side because of years of trying to draw it out. The pendulum swinging defines all things including finance.

I absolutely agree, demand is not there because of too much debt and lack of traditional interest rates for savers being the most impt as gold discipline not needed with dollar as reserve currency of World we said!!

From all of the people I know (living near, and working in seattle), most people are unable to save due to wage stagnation (or slight increases), massive housing inflation, increased taxation at the state/local levels, and lifestyles which have become accustomed to debt spending. Generational cycles are interesting to study and it is amazing how they repeat with booms and busts.

1

"Consumer spending has been regularly outpacing income growth": maybe somebody can help me out here. If consumers are spending more, that money has to end up as somebodies income right? So how can one grow faster than the other?

Well put, Mish. Yeah, that’s what they said (“we’ll invest in plant and equipment”) last time there was a repatriation wave due to a tax incentive to bring that cash back. In reality, much of it ended up going towards stock buybacks and other non capex items. No reason to believe this time won’t be any different.

Truthseeker, have faith! There is a brand new generation of Utopians that place their trust in each other instead of govt.
https://www.netflix.com/title/80154500

The true driver is freedom.

"There would be no production with no demand (spending)." One cannot consume that which has not been produced. The iPhone was produced before there was any spending to buy it.

Rosenberg has been crowing bear for at least 10 years. Our economy is consumer driven. So what if the saving rates fell. I mean like get a grip. GDP numbers are always moved either higher or lower after multiple adjustments. Lets get some decent reporting here not just more endless dribble. How about reporting what is going on with the tax cuts. Multiple employers are passing on money to their employees, not to mention Fiat taking it's production from mexico to USA.

Rosenberg went bullish several years ago and was taunted by many bears

Buy signals are getting triggered by the algorithms and the bots just keep on buying up stocks. This passive investing meme is awesome. Nobody’s thinking to get in the way of an hysteria.

Savings is down, but nominal savings is within its primary range since 1998 of 5.0% to 7.5%. The Personal Savings Rate is a calculation, not a measure. Inflation is subtracted from nominal disposable income...so with flat disposable incomes and rising inflation the Personal Savings Rate looks like people are saving much less.

On the other hand, I wonder how much of the "savings" come from the top 5% since most Americans live paycheck-to-paycheck.

Discovering the obvious, consumer spending cannot outpace income growth in the long run. First the chiken or the egg? Is the economy driven by production or by consumption? Human society is a complex organization whose economy is aimed at producing goods for consumption. Some resources can be saved to be invested for future consumption, but at the end, I believe that the egg comes first.

@Ron, my mistake! I should have said production in scale (after initial production - namely test marketing and product introduction). Introduction of the iPhone led to its demand and ramp up of production. If it had been a flop, there would have been no production thereafter. My larger point was the demand is fulfilled using debt, which is cheaply available. If debt were priced right, the individual might probably have saved some money and borrowed less to buy the same iPhone. Thus the demand has been moved forward by mispricing money and is therefore artificial at that point in time. What happens when you reach a stage when demand has been pulled forward to an extent that it leaves a void in the future . Also what happens when the debt is so large that debtor cannot pay it back or cannot borrow further. If it is a bank, bail them out is the thesis now

It was my fault. I replaced my water heater in November instead of saving. I'll try to do better next time.

The so-called savings rate does not measure the flow of real savings or the size of the pool of real savings.

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