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

Mish

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​

Comments (30)
No. 1-30
Matt Foley
Matt Foley

A David Rosenberg tweet today:

“Some haunting math from the GDP number. The savings rate fell from 3.3% to 2.6%. If it had stayed the same, real PCE would have been 0.8% (annualized) instead of 3.8% and GDP would have been 0.6% instead of 2.6%.”

Mike Mish Shedlock
Mike Mish Shedlock

Editor

Thanks - I will look for that. Next time, please post a link! Thanks

bradw2k
bradw2k

That chart is impressive. For 30 years savings was about 10% or more. Then for 25 years, until 2007, it channelled down. Why?

Mike Mish Shedlock
Mike Mish Shedlock

Editor

  1. Nixon closed the gold window in 1971
Mike Mish Shedlock
Mike Mish Shedlock

Editor

  1. Interest rates were high. Promoted savings
truthseeker
truthseeker

A person I respect said it’s hard to make predictions about the future since the future ain’t what it used to be.Yesterday the news was that Trump’s policies of corporate tax cuts and and extremely aggressive attacks on regulation have been very underestimated as the business environment potential for growth is rapidly changing. So as to confirm that dynamic~first page wsj~we read dozens of changes in the tax law are causing dozens of companies to begin plans to invest and build new plants n America spending hundreds of billions of dollars and this is just the beginning.This is a very long article everyone needs to read. I certainly agree with you Mish about stocks and the wealth affect causing people to reduce their savings, yet there seams to be a profound change taking place n the country that despite all the problems we face with debt and cultural decadence this new optimism may last longer than we think. Also rising interest rates can stop all this but growth will not b strong enough to cause inflation.

Mike Mish Shedlock
Mike Mish Shedlock

Editor

I need a link. But I don't buy the story any more than I believe Walmark is raising wages because of tax cuts. It's one thing to say they will do something, it's another to do it, and it's still another to do it and find demand isn't there.

Carl_R
Carl_R

bradw2k, the savings rate was high and rising from WWII until 1975 because it was the depression generation doing the saving. Those who survived the depression considered savings as something very important. The generation that followed, the "baby boom" generation heard about the depression from their parents by word of mouth, but that doesn't make as strong of an impression as living through it. Thus, as time went by they became increasingly less prone to save. Now, as the baby boom generation retires, the savings rate will be determined by millennials, who heard there was once a depression, but they "know" that now the economic cycle has been defeated, and in any case, government will be there for them, so they have no reason to save. Mish is right that the high interest rates in the early 80's provided a temporary boost to savings by baby boomers, and that low interest rates in recent years have hurt it, but I think that's a less important reason for the long term trend than the one I gave above.

killben
killben

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

Spending and Production are like Chicken and Egg first story. There would be no production with no demand (spending). But then nowadays debt is also treated as spending. My simple theory is this is not sustainable since debts has limits and also the lowering of interest rates have limits (even NIRP).

Looking at it from the consumer side, IMO, the real drivers are real rise in wages, reduction in inequality (instead of the present skewed way of the top 1% skimming 99% of the profits) - incidentally it is a healthy way to drive demand, increase in savings rate, a low debt/income ratio. Thus demand that is not backed by the real drivers is likely to be unsustainable in the long term. In the short term it will work (since 1987 - Greenspan put - it has) but it does not take into account the costs -on individual and social- due to the human nature that impacts demand - of eating more than they can chew and trying to keep up with the Jones come what may, which is (or has to be) fulfilled by debt with lower and lower interest rates if not backed by increase in wages. Also, given human nature, you can safely assume this debt funnels its way to assets. The ride up is great but how many can get off at the top floor (which is the top floor? You got off at 25th but the elevator is now at the 35th, who knows it may reach 50th - Newton - South Seas bubble - Newton got off and got on as he could not stand it). Again is it sustainable? Common sense would you tell you no. But then, whoever said these economists have common sense.

Looking at it from the supply side, I would say intervention by the central banksters in the markets (creates moral hazard and few winners) and lowering of interest rate (like any product, it is human nature to use injudiciously if money is free) to encourage it creates malinvestment, which when the asset market breaks (it has to due to maths), means loss of capital (while some guys may make off like bandits but then these central banksters are abettors of these bandits, most will lose their shirt). Wasting capital cannot, IMO, be good for growth. Judicious investments occur when money is priced right and firms are allowed to fail (irrespective of the impact on the economy - if you say that this will take down the system so you have to bail it out, then any firm's growth strategy would be to become big enough to be always bailed out). Thus the real drivers for production would be sustainable demand, pricing the money right (I do not know what it is but it is not ZIRP or NIRP and my guess is it is likely to be a rate at which prudent people - the savers - are willing to take risks) and judicious investment.

truthseeker
truthseeker

Mish after all these years you pretty well know how the regular people on your blog think. I think people who are interested in the economic, financial news go looking around for someone they respect and and agree with most of the time, yet like to challenge your analysis from to time. I’ve always said we can’t separate what’s going on in our culture, peoples behavior from economic analysis. The drugs, the porn the corruption and loss of traditional values come before economic decadence. Mish good grief I’m trying to get you to go way deeper than tax cuts at Walmart! I am sadly very pessimistic about what I see going on n our country and the rest of the world. For the first time I remember I was trying to point out that a couple of Trump’s policies may be slowing down our rapid descent strait to hell! At this point, I pointed out last just night that worldwide economic collapse and war look like a foregone conclusion!

SweetKenny
SweetKenny

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.

truthseeker
truthseeker

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!!

MorrisWR
MorrisWR

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.

killben
killben

See the central banksters at work... all over the world. (https://www.armstrongeconomics.com/world-news/banking-crisis/ecb-forced-to-postpone-new-stricter-credit-rules-indefinitely/). If you ever want to usurp power, you need to learn it from the Fed. Nobody can do better. Pray tell me why we should not jail these bas*.

JonSellers
JonSellers

"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?

QTPie
QTPie

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.

Blacklisted
Blacklisted

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.

RonJ
RonJ

"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.

klausmkl
klausmkl

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.

Mike Mish Shedlock
Mike Mish Shedlock

Editor

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

TSPsmart.com
TSPsmart.com

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.

TSPsmart.com
TSPsmart.com

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

GiT
GiT

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.

killben
killben

@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

ReadyKilowatt
ReadyKilowatt

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

Pater_Tenebrarum
Pater_Tenebrarum

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

Taunton
Taunton

Debt is negative savings. When spending is driven by debt and not wage growth, the end result is a collapse in the personal savings rate.

everything
everything

Oh lol, I think this can explain in part what's going on with savings rates. The savers are mopre in Asia than in U.S. http://zsoltbabocsai.org/self-documentary/#sthash.Euj9ixRL.dpbs


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