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Above is a chart of the US savings rate. Notice its been declining for the last 20 years or so until it eventually started hovering around 0% and that it has recently spiked up. There are some people who are now arguing the consumer is retrenching completely; meaning, the consumer will no longer be the engine of growth. There are two strong fundamental reasons that support this conclusion.
1.) First, the best reading of job growth during the last expansion is for a total of approximately 8.2 million. In other words, job growth was extremely weak. In addition, we've seen fast rates of job loss over the last year along with real estate and stock market collapses. In other words, the macro environment is such that consumers may be paying a lot of attention to their bottom line and thinking, "I don't need to buy that right now."
2.) Total household debt outstanding has increased from 47% of GDP in 1981 to 96% of GDP in the third quarter of 2008. While there is no bright line in economics that says "above this level the household debt/GDP ratio is bad" I feel fairly certain in saying that when there is almost as much household debt as there is GDP in an economy there are serious problems. The point is the possibility that we are at a saturation level with household debt is pretty high. This leads to the conclusion that the consumer will start to pay his debt down leading to lower consumer spending.
1 comment:
What I'd really like to see is a break down of the savings rate into more detail. For example, one thing that fixes the savings rate is a bunch of people's mortgages getting foreclosed on taking them out of debt.
I have no doubt that the savings rate has genuinely been declining, but what's not clear to me is how much of that is an artifact and how much of it is genuine. For example, if you have a credit card and have a balance you pay off every month, does that amount on the card reflect debt that goes against the savings rate even if you pay it off?
Also, I would expect the savings rate to be generally declining right now because of baby boomer retirees drawing down their 401K's etc. How does that factor into the overall picture. There's little doubt that we've become much more dependent on debt in this country, but I'd really like to know how much and in what forms.
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