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Consumers Draw Down Savings For Personal Consumption
From The Daily Capitalist
February results showed that flat income growth caused consumers to tap into their savings to finance purchases of goods and services, which were up only 0.3% MoM. This means that personal savings decreased. These are negative indicators for the economy.
According to the release by the Bureau of Economic Analysis:
Personal income increased $1.2 billion, or less than 0.1 percent, and disposable personal income (DPI) increased $1.6 billion, or less than 0.1 percent, in February ...
Personal consumption expenditures (PCE) increased $34.7 billion, or 0.3 percent. In January, personal income increased $30.4 billion, or 0.3 percent, DPI decreased $26.0 billion, or 0.2 percent, and PCE increased $38.5 billion, or 0.4 percent, based on revised estimates.
Real disposable income [i.e., adjusted for inflation] increased less than 0.1 percent in February, in contrast to a decrease of 0.4 percent in January. Real PCE increased 0.3 percent, compared with an increase of 0.2 percent.
Of all the economic analysts that I follow (about a half dozen) only David Rosenberg got the analysis of these numbers right, which is a roundabout way of saying that my analysis coincides with his analysis. My thesis as most of my readers know is that there are long-term trends in the economy and significant among those is increased savings as a result of financial uncertainty and the lack of sufficient savings by Boomers for retirement.
If savings are a main motivation of consumers, and because wages are flat to declining, then a reduction in savings to fund consumer purchases is not a good thing for the economy. It means that as soon as consumers feel they have sufficient income to continue to save, they will do so, and PCE (personal consumption expenditures) will remain flat for an extended period of time.
Look at what drove PCE in February. The largest component was purchases of non-durable goods which is food and clothing (up 0.9%). Without the component of food and fuel (which has been rising in price), PCE was flat. People need food and clothing. And they have to drive and heat their homes. These aren't exactly elective purchases. The fact that they are dipping into savings is not healthy organic growth of PCE.
One could say that rising savings are healthy for the economy, rather than the Keynesian "liquidity trap" scare tactics. Keynesians and most economists confuse money (fiat money in our case) with wealth. Wealth is only created from what is called "real savings" which means money derived from productive activity which is saved and not consumed. The more real savings we have, the quicker the economy will recover because real savings are the capital needed to fund future economic activity. If it were any other way, then countries like Zimbabwe would be wealthy. You can't print your way out of a recession/depression.
The fact that people must not spend in order to save allows the economy to repair itself as unprofitable businesses shed debt and bad assets or go broke, and make way for profitable businesses to lead us out of the business cycle.
Thus a decline in savings in order to buy the basics is not good for the economy. What we can look forward to is reduced PCE in H2 because there is still pressure on wages as companies remain reluctant to hire new workers until they see consumer demand pick up. At this point, it appears that companies can't squeeze much more productivity out of the system, so wages and productivity will remain stagnant.
Another thing. Look at this article from Bloomberg on the BEA release:
Consumer spending in the U.S. rose in February for a fifth consecutive month, a rebound that will require gains in employment to be sustained. ...
Purchases of non-durable goods increased 0.9 percent, the biggest gain since January 2009, as Americans stocked up on groceries and splurged on clothing. Spending on services, which account for almost 60 percent of all outlays, increased 0.3 percent. ...
This is part of the problem in trying to make sense out of these numbers. The article says "Americans stocked up on groceries and splurged on clothing." The implication is that consumers bought like crazy. They should have said: "Americans had to dip into savings to buy the necessities of life, food and clothing." Bloomberg is cheerleading instead of reporting the news.
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Someone posted:"There is nothing preventing any of these banks from offering higher interest rates for savings vehicles."
NOT TRUE. The FDIC members banks can only pay .75% more than the national average on CDs, it's the law.
http://www.bankbryancave.com/fdic-issues-final-brokered-deposit-and-inte...
That is why ZIRP has been a CONSPIRACY, killing prudent savers and pushing Grandma off the fence into risky "investments".
I know this is off-topic, but how would the physicist explain it when the workers started hitting up the Gov. w/ workman's comp. complaints for their sore backs?
Well, you just have the government hire one bunch of guys to dig a ditch and then another bunch to fill it back in. That way, consumption gets stimulated and the economy grows.
A physicist would say no work has been done.
Paul Krugman would applaud the stimulus and demand 1 billion new ditches.
Rahm Emanuel would name the ditch "The Obama Canal".
Nancy Pelosi would wear designer boots to the next ditch grand opening.
Barney Frank would check out the ditch diggers.
The physicist and Barney Frank are the only ones with a clue, I guess.
+100
In the National Income statistics, savings is treated as a residual (income-expenditures). So it's going to be a volatile series. I think it's better to look at rolling 3,6 and 12-month savings rates to get a better picture. This also smoothes weather-related events.
In any case, it has been trending down lately.
1foretheroad is spot on, out of my five closest neighbors only two of us are still paying their mortgages on time.
I feel like a bigger idiot each month I write the check as there seems to be no consequences to the ones who don't pay.
I need to be deprogrammed asap! F**k the banks.
It means that as soon as consumers feel they have sufficient income to continue to save, they will do so, and PCE (personal consumption expenditures) will remain flat for an extended period of time.
I think you have it backward here. I've been following personal savings rate as the key factor for for future economic growth since consumption is 70% of demand and the savings rate has been rising. Once the personal savings rate stabilizes at a new number then future income growth will go into consumption. I expected it to stabilize at 6-7% but it's showing signs of stabilizing lower.
To say that people target consumption and then anything extra goes into savings is ... Well, do you know anyone that does that? Or do most people consume more when they make more?
While it's still too early to tell if savings is stabilizing (everyone always gets too excited over monthly data), when it does stabilize then any income growth will go into consumption and GDP growth.
There are significant long-term trends at work: Boomer retirement (they are the biggest spenders in the economy), reduction of debt, and increased savings by all sectors to cushion against economic cycles. If, as you say, the savings rate stabilizes at 6-7%, then consumption will drop dramatically. Right now, people are afraid of the future and that doesn't translate into spending. If wages rise substantially then consumption will rise, but I feel these long-term trends are here for quite a while, and I don't know if consumption will get back to 70% of a robust economy.
Chute not deployed.
Emergency chute torn, tangled, non functional.
Ground coming up quickly now.......................
When you quit paying your mortgage you have instant spending money. Its their way
of helping the economy.
Actually, that's a good point. It is a significant factor.
Gee, I wonder what happens when the recession outlasts personal savings, as this so called recession is poised to do...
So much for all that "money on the sidelines." People are spending their savings, not investing it.
Took the family on a road trip over spring break last week; we drove through four states and spent the week in the Atlanta area...every restaurant we stopped at (which included all price points) on the way down, while we were there, and on the way back was packed...every shopping mall my wife drug me to was packed...every parking lot at the malls we didn't stop at were 1/2 to 3/4 full (on weekdays no less).
I've noticed these same trends occurring near home over the past few months, so I was eager to see what was going on elsewhere. Granted, my observation set is way too small to assume the trends are occurring nationwide, but it's what I have.
Point is, I agree with you that a good portion of the spending increase was on necessities, but don't write off the discretionary component completely, because it's not only occurring, but seems to be increasing (at least from my observations).
I'm not sure I agree 100% with the negative assessment. Let's take the above argument, that the rise in consumer spending is attributable only to increased use of personal savings.
While the use of savings may explain where spending is coming from, it doesn't do much to explain the increase in consumer spending.
Is the assertion that consumers are not only dipping into savings, but also increasing their rate of purchasing? Why?
This assertion seems conterintuitive. One would think that a consumer who is forced to dip into savings would also reduce their rate of consumption -- not increase it.
One reason is that CPI in Feb., especially medical care, was higher (+2.1%). Fuel was down in Feb., but up 36% YoY. Food basically unchanged. The key is lower wages.
"Americans had to dip into savings to buy the necessities of life, food and clothing."
This is absolutely correct. Those on unemployment insurance don't receive enough and must use savings to get by. There are increasing numbers of people coming off unemployment which will exacerbate this situation, make no mistake about it.
Might be interesting too to look at the consumer credit card debt numbers. Folks throttled back a while and may have actually reduced their balances, thus creating some room between their balance and approved limits which were tapped for essentials. Wouldn't surprise me at all if that is where this came from.
The gap between the sunny weather on Wall Street and the persistent rain on Main Street was never more evident. Heard a story about a specialty tile installation for a commercial project running now. Normally a couple of bids. This time 18-20 bids, and numbers so low the recipient was wondering how they make any money. I opined that the answer is that they do not, but merely pay for necessities. A slow cancer is eating its way through some quarters, and it is hard to see, but there if you look for it. No one is destitute - yet. But there is no end in sight.
If savings are a main motivation of consumers, and because wages are flat to declining, then a reduction in savings to fund consumer purchases is not a good thing for the economy.
No, but it certainly helps to drive market prices ever higher heading into the end of a quarter - leading to ever larger bonus pools for Fraud Street - which is, of course, all that matters. And the sheeple bleat their approval.
Well said as always, Mr. Harding.
"As Americans stocked up on groceries..." I bought 200 lbs. of oatmeal in 8 six gallon, mylar lined and sealed pails this past week. I guess you could say I "stocked up" on oatmeal.
Where?
Thanks.
Emergency Essentials their "Superpail" sale ends today (3/31). I paid $250. for the above purchase delivered. The oatmeal should last ten years stored properly (cool, dry) and is an excellent "super food" which requires only hot water to prepare.
+1
Storm's a brewin'. Food will be more "valuable" than precious metals in a collapse - have extra pails to trade if anyone is stupid enough to be out there bartering when people are starving to death. PMs are a means to an end after the dust settles.
For some reason Americans think it just can't happen. They don't want to believe it - but we are not immune to the repetition of history; grocery shelves don't stock themselves.
Eh, I'm probably preaching to the choir. Maybe I should go over to Huffinglue Post and stir things up a bit.
Or not.
Why should I give those deaf/blind bastards a leg up? Darwin, anyone?
Actually days off caused by snow storms led to a stampede to shopping malls. As a result of unexpected accumulations, many were stranded in shopping malls for days.
Now that's creative consumption. Barricaded consumption?
Thanks for another excellent analysis, Econophile. The high fives from the government economists remind one of the self-congratulations of the Soviets on achieving a record wheat harvest when in fact the production continued to be dismal, as usual. And just as the people in Russia had no voice to describe their suffering, Americans can hardly expect Bloomberg or the BEA, i.e., the “government,” to recognize their suffering. The following companion piece in today’s WSJ supports your argument, as does the addendum from SWRichmond. Both appeared briefly on Frontrunning: March 30:
Low Interest Rates Are Squeezing Seniors by Charles R. Schwab
Today’s historically low interest rates may be feeding banks’ profitability but they are financially starving our seniors.
In February 2006, when Ben Bernanke was first sworn in as chairman of the Federal Reserve, the federal-funds target rate stood at 4.5%. That same year, the average yield on a one-year certificate of deposit was 5.4%. A retiree who diligently saved for a lifetime and had amassed a nest egg of $100,000 could count on an added $5,400 in retirement income per year. That may not sound like much to the average Wall Street Journal subscriber, but for a senior on fixed incomes that extra money improved the quality of his life.
Today’s average rate for an identical one-year CD is roughly 1.3%. On the same nest egg, that retiree will now get annual payout of just $1,300—a 76% decline in four years.
Some would argue that today’s low inflation rate offsets the decline. But even at an inflation rate of zero, a 76% decline in spending power is painful. And we’re already seeing signs of inflation this year. The first two months of 2010 showed an annualized inflation rate of 2%, further exacerbating the spending power problem for retirees by eroding the value of their principal.
To be sure, the country’s recent financial crisis required unprecedented action by the Fed, including lowering rates to levels not seen in more than 50 years. In particular, the infusion of capital into the banking system through historically low fed-fund target rates pulled may banks from the precipice of collapse. By that measure it has been a resounding success.
Yet these unprecedented low rates have now been in place for almost 18 months. As a result, banks have enjoyed virtually free access to money while retirees have been deprived of any meaningful yield on their fixed-income portfolios. For a large segment of our population—people who worked long and hard, who followed the rules by spending less than they earned and putting the remainder away to keep themselves independent in retirement—the ultra-low interest rate is more than a hardship. It’s a potential disaster striking at core American principles of self-reliance, individual responsibility and fairness.
To put the scale of this problem in context, consider the fact that more than $7.5 trillion in American house-hold wealth is held today in short-term, interest-bearing products such as checking and savings accounts, retail money funds and CDs. At today’s low interest rates, the return on those savings is hundreds of billions less than it would have been at 2006 interest rates. Retirees feel the consequences disporportionately, but because much of that income would have made its way into the economy, spending and job creation also suffer.
I see the pain that low interest rates have caused very directly. My company, Charles Schwab, serves millions of individual investors, many of whom are 65 and older. These people depend on cash savings for their financial well-being.
Many in this age group are being forced to stretch for income one of three ways. One is to take on more risk just as they are progressing through retirement. Another is to go longer in maturity with their fixed income investments, locking them into a situation where inflation will bite further into their principal and purchasing power. And the worst is the slow erosion of principal that is already occurring as people cash out of savings to make up for needed income.
It’s not just retirees on fixed income we should be concerned about. Let’s not forget that savers of all ages—even the young person opening his first savings account—need some incentive of future reward for saving. Today, there is none.
The large banks are well on the mend. Profits are improving and they’re doing just fine. Our seniors are not. Those in Washington should keep their plight in mind as they consider Fed monetary policies going forward. (emphases mine)
Mr. Schwab is founder and chairman of the Charles Schwab Corporation.
(The Wall Street Journal - OPINION - p. A19)
With this addendum from SWRichmond:
Why didn't Schwab go just one step further? Those hundreds of billions of dollars represented cost of borrowing to the Wall street banks. Those now-avoided costs mean that this very real hundreds of billions of dollars have flowed, instead of to retirees as income on their hard-earned savings, directly to the bottom line of the banks. This was enabled directly and purposefully by the banks' agent, the Federal Reserve, and its head, Ben Bernanke. This is theft, plain and simple. It is theft by a non-government agency and protected by the government itself.
Definition of "conversion of funds" Fraud
improper use of somebody else's money the act of using money that does not belong to you for a purpose for which it is not supposed to be used.
There is nothing preventing any of these banks from offering higher interest rates for savings vehicles. Competition (yah, such a capitalist concept) in this arena might lead the way to systemic realignment, but until one of the 1st National Megabanks decides to treat its customers as customers, they will ALL continue to treat everyone as cattle in the pen.
What happens when airlines drop their fares? Everyone else follows, even if it means slicing their profit margin -- getting customers in the door and pushing volume through (in addition to increased profile and reputation) offsets the small loss. Turn this concept upside-down (or is it inside-out?), and you have the same opportunity in a banking-interest situation.
Proof that the banks are all complicit and are taking one side. If any of them were really about their mission statements of providing sound capital management for their customers, they'd be falling all over themselves to offer 1/2% more than anyone else.
Excellent work.
This is not unique to the USA. My 83yo Pa in the UK is hurt by the scenario you describe.
schwab's three ways of coping with the double black diamond 1-10 year yield curve suggest some ominous wealth effects down the line when yields rise based on widening credit spreads owing to weaker economic news, increased treasury yields due to rising issuance/lower demand (as debt outstanding races toward 100% of gdp) and, later, when some kind of actual recovery occurs causing higher private credit demands to coincide with the still strenuous government needs for funds to pay for still growing pension, social security and health care liabilities (or, possibly the wild card, yet more war).
We are just piling up just enough money to make a transfer to make a debt disappear. Once that happens the lack of monthly payments and no interest repeated often enough; will result in wife and I owing no one anything except our daily bread and electric/gas to cook with.
THAT is why the banks feel flush at the moment, just the lull before the BIG payoff of debt on our part and deprivation of interest income on THIER part.
But until sufficient payoff funds are saved, we only spend out of our own vault what we must to finish out the month. Always accumulating.
seagull
so you and wife live in one room cook on single hot top. and eat dry bread
congratulations the American dream /
stop consuming . LOL
Dumpster, proving your worth over and over again.
yes
q
Before too long, many people might dream of owning their own one room, having a single hot top, and can get hold of bread.
/hyperbole off
Yep
/reality on:
http://dignityadvocate.files.wordpress.com/2009/07/tent-cities-on-the-in...
---
I'm long tarps:
http://www.worldculturepictorial.com/images/content_2/homeless_tent-city...
What's with Bloomberg this week? Or is it just me?
porkulus
its you lol
dupe
I find it amazing that people believe the savings rate was increasing in this country. Income - consumption= savings ? How about Income-debt reduction-consumption= savings ?? Consumers have been paying down their debt,not consuming--but it equates to savings ?? Americans ,at least this generation,don't save ,they consume... The bell will be ringing once the government stops supporting the market and economy