On Monday personal income, spending, and the savings rate for July were reported. Spending was up 0.4%, while the savings rate declined 0.3%.
Readers already know that for the last 5 years, households have been rebuilding their balance sheets. In April 2005, they saved a paltry 0.8% of earnings. That rocketed as high as 8.2% in May 2009. With the latest reading, personal savings was 5.9%. My position is that the "slow motion bust" won't be over until that balance sheet is fully rebuilt, with a savings rate closer to 10% as it stood in the 1970s and 1980s.
But, in the shorter term, we don't want the balance sheet rebuilt too quickly. When households cut back on spending - out of fear - in order to save, that is Keynes' Paradox of Thrift that throws the economy into a recession. A couple of weeks ago, in How Pavlov's Dogs explain the Sputtering Recovery I argued that it was exactly a case of paralyzing fear that put the economy into a sudden stall beginning at the end of April with the Euro crisis.
The tradeoff between savings and consumer spending is evident in the below graph. Since unfortunately the St. Louis FRED won't allow me to graph the rate of monthly change in the savings rate, the below is the best I can do. In the graph, the savings rate, normed to zero at its highest rate, is shown in blue. The change in retail sales, normed to zero at its lowest change, is shown in red, beginning of 2009.
While not exact, the general "mirror image" is clear. When the savings rate decreases (the blue line goes down), the change in retail spending increases (the red line goes up). When savings increase, the change in spending decreases. Note in particular the big increase in the savings rate in April of this year that coincided with a sharp decrease in the rate of retail spending. That was Pavlovian fear kicking in.
In tht regard, even if it is only one month, that consumers were comfortable saving a little less and spending a little more in July is a good sign that their Pavlovian fear may have begun to abate.
5 comments:
As a matter of intellectual discussion..I think the level is 7.5%...which was the average of from 1980 to 1995...3 month treasury bills averages 6.3% for the 1970's and 8.8% for the 1980's...at some point when the fear
subsides the poor rates for saving
when slow down the savings rate or
keep it steady....
It seems to me that any income that isn't spent is saved, and that both consumer spending and saving are dependent on income (people cut back on both when income drops.) I think that the correlation between the two variables is not causal, but due to both correlating with income. How do you argue that the savings rate going up to 10% will end the slow motion bust when every dollar saved detracts from spending and from GDP (hence, income, on which spending and saving depend)?
Got a beef..Calculated Risk seems to be cherry picking data..why is he leaving off today's ISM numbers???
nevermind...my bad....
Jake: Sorry, I guess I wasn't clear. It is once the savings rate is *at* ~10% that I anticipate it will stop rising on a secular basis and that is when "the slow motion bust" will end.
Yes I agree that both are correlating with income. That both numbers moved in the same (good) direction in July is a confirmation, as opposed to just one of the numbers moving in that direction.
Hope I've been clearer.
Brodero, thanks as always. I suspect the number will "overshoot" before it stabilizes.
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