Submitted by Lance Roberts of Streettalk Advisors
The Decline Of The American Saver And The Economy
In the most recent release of the Personal Income and Disposition report by the Bureau of Economic Analysis the headline numbers were seemingly very good with personal consumption expenditures up 0.7% and personal incomes rising 0.3%. Unfortunately, that is about where all the good news ended.
We have been discussing as of late in previous articles about the dynamic change that has taken place since 1980 in our country. There is almost a clear demarcation line that exists at the end of the 70's as we shifted from a manufacturing and production society to a financial and service based society. No matter how you look at it - whether through GDP, debt, incomes, savings or consumption; beginning in 1980 there is a clear decline in the quality of financial health of both individuals as well as the country.
You can see this clearly in the current release of the personal income and disposition figures. In 1980, the year over year change in personal incomes hit their highest peak at almost 12%. Personal incomes had been steadily rising since 1959. Not surprisingly, there is a very high correlation between the year over year change in incomes and personal consumption expenditures.
This change in income and spending behavior can be, in my humble opinion, directly tied to the increases in productivity through technological innovation which has impacted incomes but it was the deregulation of the financial industry over the last 30 years that most affected consumer behavior. The later is the most important point for this discussion.
During this time frame the consumer, due to enticements from the financial industry for easy credit, a booming wealth effect from the stock market and then housing, and a easy and accommodative monetary policy, shifted from a "save and then spend" society to a "spend and pray" society. This is clearly seen in the decline of the personal savings rate. The vertical black line notes the apparent shift in consumer behavior. The difference between pre- and post-1980 was productive investment.
Productive investment comes from savings which leads to stronger economic growth. This is most clearly seen in the steady decline of GDP as compared to Personal Savings. As consumers migrated from saving and productive investment the output of the economy has likewise declined. As Americans became addicted to a lifestyle they could not really afford the need for "fast money" became ever more apparent. The "greed factor" was then fed upon by the financial institutions that were more than happy to increase the leverage cap on consumers. This in turn led to the eventual bust in 2000 and then again in 2008. The government, via the Fed, was also complicit in this turn in the average American by fueling speculative excesses through easy monetary policies and excess liquidity.
So, now that you have the background to this story - let's take a closer look at the income and disposition numbers starting with the income side of the equation. Where did the income increase come from? It wasn't coming from wage increases as shown. This, of course is really not much of a surprise considering that the whole increase in corporate profitability came from cost cutting (lower headcounts) and increased productivity (employees doing more for less money). This, of course, is not a sustainable trend which is why we are deeply concerned about corporate profit margins in the coming quarters - however, I digress.
The most telling increases to personal income have come from government transfers (welfare, unemployment, etc.) and some of the lowest taxes as a percent of income on record (recent payroll tax cut for example). While this artifical boost has come at a much needed time these are again artifical stimuli and are transient in nature. For a long term economic recovery real wages need to increase in order to support longer term consumption patterns that are traditionally supportive of a growth economic structure - this includes an increase in personal savings. In more simplistic terms - America needs to get back to the point where it saves more than it spends.
However, that brings us to the disposition part of the consumption function. If consumers are earning less on a prorata basis but spending is increasing, then where is that consumption flowing to? The chart shows the percentage change in the actual dollars (seasonally adjusted) spent in the PCE report on food and energy relative to disposable personal income. Not surprisingly since the bottom of the "official" recession - food and energy have been rising fairly sharply and the trend since 2000 has been a larger portion of the disposable budget being eaten (literally) by these two areas. This, of course, reduces the overall growth in disposable personal income and when the family budget is already under duress this leads to cuts in overall consumption trends.
The bottom line, and as shown in our final chart is that previous to 1980 when our economy was built around a balanced consumer - consumer savings ranged around 8%, GDP was growing and consumer spending averaged between 61-63% of the economy. Post 1980 - as the introduction of leverage and financial charades took the place of common sense; consumption has been steadily increasing to over 70% of the economy today while GDP has been steadily declining to the whopping 3% average GDP environment that we are trapped in today.
The problems that exist today are a function of America, as a whole, losing sight of what brought this country to its feet. A generation of savers and investors (individuals that took capital and built something with it) has turned into a generation of gamblers and speculators in many regards trying to build wealth through service based programs and financial transactions that generate little or no economic throughput. The end result will be a malaise of economic growth into the future plagued by higher levels of real unemployment, a weaker financial system as 78 million baby-boomers become net capital extractors and higher interest rates and inflation caused by excessive liquidity and theoretical monetary policy.