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TMFDeej (99.47)

U.S. Savings Rate at Highest Level in 15 Years

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June 26, 2009 – Comments (23) | RELATED TICKERS: E

I have been a firm believer for a while now that the current economic mess that we find ourselves in would scare U.S. citizens into doing something that they should have been doing all along...saving money.  Fresh evidence of this trend of increased consumer saving was published this morning.

The U.S. personal saving rate, which actually fell slightly below zero during the obscene credit bubble, increased to 6.9% last month.  This is its highest level in 15 years.  Of course, as the paradox of thrift states, it's terrible for the economy in the short run if everyone starts saving more money at the same time.  Having said this, in the long run I believe that this increased rate of savings is a very good thing for America.

I think that we will experience a secular shift in the way that Americans look at money, in which the personal savings rate will eventually approach or possibly exceed 9% and stay at that level for some time.  Some economists believe that the U.S. savings rate will soar to 10% or 11%.  Needless to say, if this comes to pass it will serve as yet another headwind for U.S. economic growth over the next several years.

So who benefits from this trend?  It certainly won't be companies in the consumer discretionary sector.  I'm staying far away from those.  Banks are definitely one of the beneficiaries of this trend.  Deposits are a cheap source of funds for them.  Bank deposits increased 1.7% in May.  That is the ninth largest single month increase since 1973.  Of course, banks' balance sheets are so messed up right now with all of those toxic assets floating around that I doubt that even this trend can help them.

U.S. Savings Rate at Highest Point in 15 Years

Deej

23 Comments – Post Your Own

#1) On June 26, 2009 at 12:02 PM, sarcaz (20.34) wrote:

And we'll all get punished for it with inflation.

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#2) On June 26, 2009 at 12:19 PM, russiangambit (29.94) wrote:

A couple of points:

1. state -promoted and underreported inflation of the last 10 years punished people for saving, so the money was put into risky (presumably higher-returna assets), which recently blew up. The inflation situation has't changed, we still have inflation target of 2-3%, and that is official inflation. So, not to lose yuor savings you need to have them at least at 3%. I don't know of any risk-free investment that currently returns 3%. So, savings are still discouraged.

2. Since savings are still discouraged, my conclusion is that savings are  either forced or over-reported or both.

Savings are forced - by losing access to easy credit, consumers are forced to "save". Actully, it means that they are forced to pay off debt since it is the people with bad credit/ high debt  who lost it. So, there are no money there just waiting to be spend, the money is used to pay off debt.

Savings are over-reported - I've seen a trimtabs reports who say that atually the government number of personal income is inflated, the correct number is 5% lower and this is the 5% that shows up as "savings" in official reports, in fact there are no savings, people still spend everything, they just have less money.

Conclusion - don't expect the sharp recovery in consumer-discretionary  stocks, which is currently priced in. People don't have "savings" and they won't be going out and spending them not now not later in the year. JCP at $30, forget about it.

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#3) On June 26, 2009 at 12:22 PM, MattH42004 (85.75) wrote:

Thanks for posting about this Deej, I don't think most realize how important this is. I did the math on this, and if we go back to 10% on the savings rate that is about 1.2 trillion per year that comes out of the economy. Thats PER YEAR! The stimulus bill, and it was a massive stimulus bill, is "only" 700 billion, and that's spread out over the next 3-5 years. I still don't think the majority of investors realize just how much of corporate profits were dependant upon that 0% we were running.

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#4) On June 26, 2009 at 12:38 PM, leohaas (93.62) wrote:

Excellent post!

No doubt it will bring out plenty of whacko comments. I will be following them over the next couple of days, cuz I an do with some laughs.

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#5) On June 26, 2009 at 12:42 PM, jddubya (< 20) wrote:

I'd like to know who exactly is doing all the saving? I go to a local restaurant - packed. I go on a mexican cruise - sold out. I go to a local indian casino on a Saturday afternoon no less and it's crowded.

So it seems like the discretionary spending sector would actually not be a bad place to put some cash, but to be honest, I'm not. My reasoning is ridiculous of course - "it just doesn't seem right"

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#6) On June 26, 2009 at 12:42 PM, Melaschasm (88.99) wrote:

I am not a big fan of official savings rate numbers because of the way they are calculated and reported upon. 

One of the things people do not seem to understand is that savings and investments do not hurt the economy.  If I save money, that money will be used by someone else, so it is not leaving the economy.

Think of it this way.  If a person works 40 hours per week and produces $50 worth of product per hour, then that persons contribution to the GDP is $2000 per week.  It does not matter if the $2000 is spent or saved, the production remains $2000 either way. 

I know this is an oversimplified explanation, and I agree that many Americans need to reduce their debt, as well as increase their retirement savings.  However, the savings rates, national savings rates, and similar factors are not explained well, nor are they widely understood.  I do think they provide some useful directional value, but I would be very cautious in making major decisions based upon the savings rate, until you fully understand what is used to calculate that particular rate.

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#7) On June 26, 2009 at 12:59 PM, FoolishChemist (98.15) wrote:

This is great news.  Still way below my 40%+ savings rate though.  It's not fear that drove me to save, I've always had a hard time buying things.  It's not a phobia, just I have to justify to myself the expenditure.  If my pants have a hole, then buy otherwise why do I need another pair?

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#8) On June 26, 2009 at 1:06 PM, BradAllenton (31.74) wrote:

The government will eventually smoke everyone who is saving out of their fox holes with the inflation bomb that they are constructing. Deflation is this nations only hope for longer term financial health, but the gvmt is fighting it tooth and nail.

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#9) On June 26, 2009 at 1:37 PM, TrailerParkJawa (< 20) wrote:

Could someone explain what the savings rate actually is for those of us who might not be sure? So, I put away 15% of my pay into 401k and 5% into a normal savings account do I have a savings rate of 5% or 20% ?

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#10) On June 26, 2009 at 2:05 PM, Schmacko (92.75) wrote:

I think russiangambit's points are why I never used to have more than $500 in my savings account at any one time... it just didn't really make sense.  A couple years ago you could get CDs with yields in the 3 - 4.5% range now most CD offers I see are in the 1-2% range unless you go real long term with them.  For example USAA is offering 3.5% yields on 7 year CDs.

I think as long as savings accounts have yields as low as they do Americans will be "discouraged" from saving much like russian posted and will look for other places to park their money.  That being said I can't see how America as a whole raising it's savings rate is a bad thing and I'll never understand people who argue that it is.  If you need a certain level of money in a bank to guarantee the economic well being of yourself and your family being told to spend it all for the greater good of the country just seems nonsensical. 

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#11) On June 26, 2009 at 2:14 PM, russiangambit (29.94) wrote:

> Could someone explain what the savings rate actually is for those of us who might not be sure? So, I put away 15% of my pay into 401k and 5% into a normal savings account do I have a savings rate of 5% or 20% ?

Savings are calculated as income - spending. I am not 100% sure, but I think investmens like 401K fall into spending, and so they won't be included into savings.

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#12) On June 26, 2009 at 2:28 PM, Melaschasm (88.99) wrote:

Could someone explain what the savings rate actually is for those of us who might not be sure? So, I put away 15% of my pay into 401k and 5% into a normal savings account do I have a savings rate of 5% or 20% ?

I don't have all the answers, and some of them depend upon which savings rate is being discussed (yes there are a bunch).

I have been told that at least some of the calculations do not consider 401k contributions to be savings (it is removed from the income side of the equation, but not added to savings). 

For the most part changes in the value of assets do not count as savings changes.  For example, if your stock market account increases by 20%, that increase does not create savings.  When the market collapsed last year, that money did not cause a hugely negetive savings rate, even though people's wealth decreased significantly.

 

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#13) On June 26, 2009 at 2:33 PM, rofgile (99.00) wrote:

If lots of American's are saving, looking for better returns at the time that treasury and bank yields are low, what will happen:

Consumer stocks will have low earnings.

Consumer goods prices will continue to fall to induce spending.  - Wages aren't going up, jobs are being lost.  - This sounds nothing like inflation.  This is deflation.  Inflation occurs when there is high employment, rising wages, and an overheating economy.  We are the opposite of this.  Wake up inflation peoples!!  Further, banks keep sucking additional money out of the system, while the speed of transactions is slower. 

Stocks as a whole might start running higher PE's - as all the saved money goes looking for returns.

Starting to sound like our situation - lots of bears confused as why the market is going up with earnings still going sideways for a while.

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#14) On June 26, 2009 at 2:56 PM, Option1307 (30.48) wrote:

Good post Deej.

I encourage everyone to check out Dwot's post if they haven't already. It discusses some of the issues that Russian raised above. Food for thought.

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#15) On June 26, 2009 at 3:12 PM, Melaschasm (88.99) wrote:

Consumer goods prices will continue to fall to induce spending.  - Wages aren't going up, jobs are being lost.  - This sounds nothing like inflation.  This is deflation.  Inflation occurs when there is high employment, rising wages, and an overheating economy.  We are the opposite of this.  Wake up inflation peoples!!

I disagree about the inflation issue. When people save, the money is used in other ways, such as businesses buying capital goods.  It is not a change in savings rates that is causing the economic problems we face, but rather the economic problems are causing consumers to change their behavoir. 

The reason why I, and others fear inflation is because the government is printing money.  Even if consumers spend nothing, the government is capable of printing enough money to generate inflation.  The uncertainty about inflation is because people do not know how much money can be printed before inflation becomes a major problem.  Because Bernanke fears deflation (he thinks it could cause a great depression), I think Bernanke will print to much money, causing inflation.  Also, if you look back at Fed policy, they have rarely allowed deflation, although they occasionally allow to much inflation.  Thus history is on the side of those who fear inflation is going to result from current government policy. 

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#16) On June 26, 2009 at 3:25 PM, TMFDeej (99.47) wrote:

Calculated Risk had a great graph that illustrates the dramatic swing in the saving rate from negative n 2005 to where it stands today:

Deej

 

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#17) On June 26, 2009 at 3:41 PM, catoismymotor (67.75) wrote:

Spectacular graph. I am glad that such a strong and sudden shift to saving has occured. I would like to see this shift as permanent, with 10% being the norm. Will this increase in saving slow the recovery? Yes. Will it result in a stronger economy in the long run? Yes. Will it keep stocks within the "tasty" range for a while longer so we can snatch them up. Yes.

Keep doing what is working for you. Those of us with a plan aimed at growing future wealth will look back at this as being the best time at the worst of times. My apologies to Mr. Dickens.

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#18) On June 26, 2009 at 3:58 PM, maxnik0215 (51.05) wrote:

the people who are saving are the once who still have jobs, but not too sure about future - so they are hording as much cash as possible into savings type of accounts. They are not really looking for any returns, just to have some safety in case their jobs disappear.

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#19) On June 26, 2009 at 4:26 PM, booyahh (< 20) wrote:

"I think Bernanke will print to much money, causing inflation"

All that printed money your fear is being hoarded by the banks. And even the few cases that it isn't, nobody wants to borrow any more. So Bernanke may as well print all that money and bury it in his backyard, because it isn't making it's way into the system. By the way, this is exactly what happened to Japan, and 15 years later they're still suffering from deflation, not inflation. Japan has run much greater deficits (relative to GDP) than the US, and it has engaged in many bouts of quantitative easing. None of it worked. The result, once again, was deflation. 

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#20) On June 26, 2009 at 8:39 PM, threepaweddog (28.81) wrote:

This may shed some light onto the "are 401(k) contributions savings" issue.

Since IRA and 401(k) contributions are not part of personal outlays (and, therefore, must be included in the difference between personal income and personal outlays), these contributions are included in national saving computations. 

From: http://www.frbsf.org/education/activities/drecon/answerxml.cfm?selectedurl=/2005/0508.html

 

 

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#21) On June 26, 2009 at 10:30 PM, portefeuille (99.75) wrote:

Here is another way of keeping people from saving "suggested" by Mankiw.

chart of the effective federal funds rate

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The daily effective federal funds rate is a volume-weighted average of rates on trades arranged by major brokers. The effective rate is calculated by the Federal Reserve Bank of New York using data provided by the brokers and is subject to revision.  

----------------- 

(from here)

real monthly average federal funds rate in figure 1 here.

 

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#22) On June 27, 2009 at 3:26 PM, eldemonio (98.81) wrote:

Our increased savings rate is like a fugly girl with a banging body - looks good from a distance, but as you approach, you want to throw up. 

Saving dollars does not make sense if you consider the pending doom of catastrophic inflation.

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#23) On June 27, 2009 at 3:55 PM, Melaschasm (88.99) wrote:

All that printed money your fear is being hoarded by the banks. And even the few cases that it isn't, nobody wants to borrow any more. So Bernanke may as well print all that money and bury it in his backyard, because it isn't making it's way into the system. By the way, this is exactly what happened to Japan, and 15 years later they're still suffering from deflation, not inflation. Japan has run much greater deficits (relative to GDP) than the US, and it has engaged in many bouts of quantitative easing. None of it worked. The result, once again, was deflation.

 

So far.  We might have stagnant deflation like Japan, or we might repeat the stagflation policies of the 1970's.  After watching increases in taxes, spending, and new money being printed, I think we are more likely to see stagflation.  Either way, the US is going to have a rough few years.

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