Originally posted at Briefing.com
Isn't it great that gas prices have come down? That means consumers will have more money to SPEND, SPEND, SPEND. You got a raise? Great! Now you have more money to SPEND, SPEND, SPEND. You refinanced your mortgage at a lower rate? Sweet! Now you'll have more money to SPEND, SPEND, SPEND.
Then again, factors like those above, and others, that boost disposable income also create an opportunity to SAVE, SAVE, SAVE. Some people do just that, yet too many people take a spend first, save later approach that is ultimately positive for the U.S. economy but negative for their financial security.
It is a vexing problem with people living longer, reputable reports indicating that both the Medicare and Social Security trust funds won't have the resources in the not-too-distant future to pay full benefits to recipients, and less than half of U.S. households having any stock holdings (i.e. more than half of U.S. households have not benefited from the stock market's run to record highs).
[Read: February Macro Update: A Trend of Consistently Better Growth]
When it comes down to it, we need to save more. A recent survey completed by Bankrate showed only 22% of respondents felt more comfortable about the amount of money they had in savings versus 12 months ago.
Saving money is a prudent thing to do and it is a necessary thing to do given the painful experience of the financial crisis and the shaky status of the nation's entitlement programs. The only problem is that such prudence will be a drag on economic growth.
Spend It or Save It?
It has been widely reported that consumer spending on goods and services accounts for nearly 70% of the U.S. economy. At 68.2% currently, it is close to its highest level over the last 50 years.
Something else that sticks out about the rising trend in consumer spending is that it has occurred for the most part alongside a decline in the personal savings rate that started in 1975.
We can't be so bold to say there is definitive causation, yet the decline in the personal savings rate happened to coincide with the leading edge of the Baby Boomers coming into their prime spending years, a drop in interest rates that was precipitated by Paul Volcker's anti-inflation campaign, the increased use of credit, and the secular bull market of 1982-2000.
Of course, one of the great and defensible knocks on the Federal Reserve's current monetary policy is that it puts savers at a huge disadvantage. Deposit rates are at ridiculously low levels. Last check on the savings account at my bank showed an annual percentage rate of 0.05%. Saving at that rate is actually losing money after factoring for inflation.
Treasury yields are at historically low levels and rates on certificates of deposit are nothing special.
[Listen to: Lifetime Income Series: Staying Alive - Surviving Retirement with 0% Interest Rates and 0% Bond Rates]
It ain't easy saving money the old-fashioned way these days, because the new fashion has been to keep policy rates at the zero bound in order to get people to buy stocks, to purchase homes and durable goods, and effectively to SPEND, SPEND, SPEND so the economy can reach escape velocity.
Well, escape velocity remains elusive because household formation has slowed with tight credit standards, high levels of student debt, and delayed career tracks for younger workers. It has also been elusive because borrowers have been deleveraging, business investment has been weak, and income gains have only increased for the highest quintile since 2007 (and since the early 1980s for that matter).
An Eye Opener
The latest Personal Income and Spending report from the Bureau of Economic Analysis showed personal savings, as a percentage of disposable income, at 4.9%. That is up from a low of 1.9% in July 2005, yet still well below the 50-year average of 8.1%.
All else equal, when consumers save more, they spend less. That's a simple deduction, but an important one because a higher rate of savings will result in delayed consumption that weighs on economic growth.
The retail sales reports for December and January exposed a propensity to save more on the part of consumers as core retail sales, which exclude auto, building materials, and gasoline station sales, increased at a slower pace than aggregate earnings growth did over the same periods.
The January Retail Sales report was an eye-opener in that respect. Core retail sales rose just 0.2% versus a 0.7% increase in aggregate earnings seen in the January employment report. With that report, it was apparent that the drop in gasoline prices did not lead to a big pickup in spending.
That could change, but it hasn't shown up in the data yet.
What It All Means
Not surprisingly, the personal savings rate has come down considerably from the dark days of 2009 when it hit 8.1% in May of that year. That drop has coincided with the improvement in the labor market and the remarkable rally in the stock market.
We suspect the drop can be attributed in part to the wealth effect.
Rising property and stock values, and increased dividend payments, paved the way again for increased consumption (some of it quite conspicuous) and a reduction in cash reserves as concerns about job security and declining net worth grew less pronounced, particularly for the highest quintile where a lot of housing and equity wealth is concentrated.
With the historical experience of seeing the personal savings rate drop as interest rates declined, we can't help but think that higher interest rates, if and when they come, will lead to a higher personal savings rate as individuals and households take advantage of a higher rate of return in risk-free and less risky savings vehicles.
It could still be a while before that happens, but if more households start to SAVE, SAVE, SAVE to build emergency funds, cover future education and health care costs, and/or retirement planning, as Nobel Laureate Robert Shiller recently suggested they should, there will be less to SPEND, SPEND, SPEND.
For an economy that rides on the wheels of consumer spending, a higher personal savings rate could be one more factor that keeps it from reaching escape velocity.
