Personal incomes are rising reflecting tax cuts and consumer spending is up as well, notably car sales. However, consumers are still struggling to fix their personal balance sheets, currently overloaded in debt.
Please consider Surging U.S. Savings Rate Reduces Dependence on China.
In the recession following a borrowing binge that sent consumer debt to the highest level ever, Americans are shutting their wallets and building their nest eggs at the fastest pace in 14 years.
While the trend will put the country’s finances in better balance and reduce its dependence on Chinese investment, it may also restrain economic growth in 2010 and beyond, said Lyle Gramley, a senior economic adviser with New York-based Soleil Securities Corp. and a former Federal Reserve governor.
“There’s been a fundamental change in people’s behavior,” he said. “It will affect the economy for years.”
Government data today showed that the household savings rate rose to 6.9 percent in May, a 15-year high, as personal spending increased less than incomes. The rate in April 2008 was zero.
Americans’ newfound frugality is pinching airlines such as Chicago-based UAL Corp., which is cutting staff amid dwindling demand for leisure travel. Donations to charities dropped last year for the first time since 1987, and they’re in danger of declining further in 2009.
Banks are benefiting. Deposits grew 1.7 percent in May, the ninth-biggest monthly rise since 1973.
The bigger cash reserves will lessen U.S. dependence on investment by China and other foreign countries to finance economic growth, Gramley said. The current-account deficit, which includes trade in goods, services and income transfers, narrowed in the first quarter to its lowest since 2001 as Americans saved more and brought fewer imports.
Banks are already gaining from American’s thriftiness. Fed data show that deposits at commercial banks stood at $7.5 trillion in the week ended June 10 after recording the biggest monthly increase of this year in May. “They’re getting cheap deposits,” said Allen Sinai, chief economist at Decision Economics in New York. “It’s part of the healing process.”
Rebuilding Balance Sheets
From 1960 until 1990, households socked away an average of about 9 percent of their after-tax income, government figures show. Americans got out of the habit in the 1990s as they saw their wealth build up in other ways, first through surging stock prices and then soaring home values, Gramley said.
Retailers are adjusting their strategies to reflect that new reality of a permanently higher savings rate. Saks Inc., Neiman Marcus Group Inc. of Dallas and other luxury businesses are reducing orders this year to limit supply and boost profitability.
“Across the board you are going to find less of the sizes, less of the availability in almost all of the categories,” Saks Chief Executive Officer Stephen Sadove said in an interview on June 23.
Roubini is concerned the savings rate will rise too quickly.
Nouriel Roubini, an economics professor at New York University and chairman of RGE Monitor, forecasts that the savings rate will ultimately reach 10 percent to 11 percent. What’s critical, he said in a Bloomberg Television interview on June 24, is how quickly it increases.
A rapid rise in the next year because of a collapse in consumption would push the economy, already in its deepest contraction in 50 years, further into recession, he said. If it occurs over a few years, the economy may grow.
Edmund Phelps, winner of the Nobel Prize in economics in 2006 and a professor at Columbia University in New York, said it may take as long as 15 years for households to rebuild what they lost in the recession.
“The only way we’re going to get a healthy, full recovery is over a long period of time, involving households rebuilding their balance sheets,” Phelps said in an interview on June 22 with Bloomberg TV. “There’s no silver bullet that’s going to get us into good shape quickly.”
On this issue I side with Phelps.
The increasing savings rate is a good thing not a bad one. The faster the savings rate rises the better off we will be in the long run.
Fortunately consumer attitudes towards debt have changed and changed for good, something that many have told me would never happen. Retailers are now adjusting for this new reality.
Consumer Spending Stabilizes, Incomes Rise, Wages and Salaries Drop
Bloomberg is reporting U.S. Consumer Spending Rose, Incomes Gained in May.
Consumer spending rose for the first time in three months in May as incomes jumped by the most in a year, a sign that government efforts to revive the economy may be starting to pay off.
The 0.3 percent gain in purchases followed no change in April, the Commerce Department said today in Washington. Incomes surged 1.4 percent, reflecting tax cuts and Social Security payments from the Obama administration’s stimulus and driving up the savings rate to a 15-year high.
Wages and salaries dropped 0.1 percent in May, showing the effects of mounting job losses.
Today’s report also showed inflation moderated. The price gauge tied to spending patterns rose 0.1 percent from May 2008, the smallest gain since records began in 1959. The Federal Reserve’s preferred gauge of prices, which excludes food and fuel, rose 0.1 percent from a month earlier and was up 1.8 percent from a year earlier.
Adjusted for inflation, spending climbed 0.2 percent, following a 0.1 percent drop the prior month.
U.S. auto sales rose to a 9.9 million-unit rate in May from 9.3 million the prior month. Industry estimates for June show the rate may exceed 10 million for the first time this year.
Car sales will rebound, but it’s important to remember how depressed the current level is. Moreover, a significant portion of sales this year will be profit-losing sales as dealers cut prices to clear inventories. These sales will cut into demand for 2010 as will the silly as well as wasteful, cash for clunkers plan.
Mike “Mish” Shedlock
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