Wikinvest Wire

The savings rate is rising!

Friday, October 31, 2008

In this morning's report on personal income and spending, word came that the savings rate (after-tax income less spending) rose from 0.8 percent in August to 1.3 percent in September.

While this is indeed good news, and those inclined to torture statistics could conceivably write headlines such as "Savings rate surges 63 percent", this would be a gross distortion of the current condition.

While the improvement is welcome, there is a long way to go.

Unfortunately, despite what many economist believed just a few short years ago (including at least one Nobel Prize winner) the personal saving rate is going to have to be improved the old-fashioned way - by earning more and saving less.

In this morning's WSJ Ahead of the Tape column, Mark Gongloff noted:

The Bureau of Economic Analysis on Friday releases data on consumer spending and income in September. Economists expect flat income and a decline in spending. That should boost the personal saving rate, the percentage of disposable income left after spending, which was 1.3% in the third quarter, down from 2.7% in the second quarter, when households socked away big portions of their one-time tax-rebate checks.

By comparison, the rate is more than 40% in China, which finances much of America's deficit spending.

U.S. savings have been shrinking for decades, briefly turning negative in the third quarter of 2005. All along, one camp of economists has bemoaned how little consumers were socking away, while another said rising home and stock prices made such worries foolish. That second camp has been awfully quiet lately.

The painful truth is that savings have to rise, either through a boom in incomes or slower spending. Otherwise, consumers will just have to keep borrowing. That is hard to do these days, and ultimately unhealthy in the best of circumstances.
The dimwitted view of the now-quiet economists who, a couple years back, figured that we had entered a new era where rising asset values were replacing traditional savings seems to have fallen flat on its face now that both housing and equity markets have fallen flat on their faces as well.

Nowhere was this view better expressed than by Nobel Laureate Edward Prescott who coined the phrase "unmeasured savings" back in 2006 to account for rising asset prices. Also in that two-year old post was this excerpt from a Wall Street Journal op-ed making the same argument:
Myth No. 3: Americans don't save. This is a persistent misconception owing to a misunderstanding of what it means to save. To get a complete picture of savings we need to investigate economic wealth relative to income. Our traditional measures of savings and investment, the national accounts, do not include savings associated with tangible investments made by businesses and funded by retained earning, government investments (like roads and schools) and business intangible investments.

If we want to know how much people are saving, we need to look at how much wealth they have. People invest themselves in many and varied ways beyond their traditional savings accounts. Viewing the full picture -- economic wealth -- Americans save as much as they always have; otherwise, their wealth relative to income would fall. We're saving the right amount.
This was back around the time that the Chicago Fed was writing papers that heralded the arrival of "wealth creation technology" also known as "innovative home financing", today known as "toxic debt".

Google searches on this blog (see the right sidebar) can produce some wonderful, interesting, and quite entertaining results.

Here's another blast from the past, another excerpt from the Journal on the 2006-era thinking about personal savings - Stop trying to re-define savings.
This month, the Commerce Department's Bureau of Economic Analysis put the nation's personal saving at negative $116.6 billion for December 2006.

To get that number, the bureau starts with after-tax disposable income then subtracts "personal consumption" of all sorts.

Here's what doesn't get counted, though: the increased value of stocks or mutual funds in brokerage or retirement accounts, or the rising value of your home.
If you're already trying to figure out where you stand, pay attention to the nomenclature. Commerce's study of personal saving is all about the verb -- "saving" -- what you make, minus what you spend.

But a more complete snapshot may well come from also adding in your "savings," the noun -- an accounting of your total assets and how they've grown, even if you haven't realized the gains yet.

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Anonymous said...

"Economists expect flat income and a decline in spending."

In a recession? It seems like incomes declined in our last mild recession. I can't begin to imagine what will happen in this nasty version.

John said...

The strong proponents of demand push are always true. “flat income and a decline in spending” will help to rise the saving volume and supply of money in the market. But this will keep the demand factor static. When demand is not towards north, positive cash flow is a mirage.

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Anthony J. Alfidi said...

I distinctly recall listening to Ken Fisher claim that "Americans' home equity is a form of savings" at the 2006 San Francisco Money Show. This was after the housing bubble was clearly bursting.

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