The Disconcerting Message Behind The Plummeting Savings Rate

Tyler Durden's picture

Two weeks ago we noted how the savings rate in the US had plunged to 3.1% in September 2017, its lowest rate since December 2007 which, coincidentally, was when the last recession started. Probably nothing. The September 2017 figure was less than half the most recent peak of 6.3% in October 2015. As we noted at the time, spending surged 1.0% month-on-month while personal incomes grew at a modest 0.4% and savings took the strain.

In its latest US Economics Weekly, Citi asks “Can the savings rate keep falling?”. On the negative side, Citi notes how consumption has exceeded income growth since 2016, leading to a rapid decline in the personal savings rate, especially in 2016.

Consumer credit as a percentage of disposable income is at a four-decade high, which is due to student debt. In aggregate, however, household borrowing is somewhat lower than pre-crisis levels.

Providing a further level of comfort, the household debt-service ratio is at a four decade low and net worth is at a high.

Citi conducts a scenario analysis for potential outcomes for the savings rate. The two base case scenarios are as follows:

  • Scenario 1 - consumption and income growth continue at the same pace as over the past twelve months; and
  • Scenario 2 - consumption and income grow at the same pace as they have in 2017.

Scenario 1 implies that the savings rate will fall to 1.6% by the end of 2018, taking it below the previous all-time low of 1.9% in July 2005. Based on Scenario 2, the savings rate would flatline at 3.1%.

Assuming that the tax reform legislation is passed, Citi believes that consumption might continue to run stronger than income.

Tax reform changes the calculus somewhat. Lower tax payments would imply more personal disposable income, and a boost to savings or higher consumption. Even without tax reform, consumers’ balance sheets appear in better shape than in the pre-crisis period, implying they may be inclined to continue to increase spending even at the expense of lower savings.  

The implication of Citi’s analysis is that consumers’ strong balance sheets are encouraging them to continue the consumption binge without taking undue risk. Of course, we’d like to believe in a rosy outlook for U households too. The only problem is that the aggregate data is masking the rapidly deteriorating situation for the majority of Americans. Earlier this month, we published a guest piece “The Savings Rate Conundrum” by Lance Roberts vof RealInvestmentAdvice.com. As Roberts noted.

I just have one question. If things are so good, then why is America’s saving rate posting such a sharp decline? The answer is not surprising. Despite the bullish economic optics, the reality for the majority of Americans is they simply have not yet recovered from the financial crisis. As the chart below shows, while savings spiked during the financial crisis, the rising cost of living for the bottom 80% has outpaced the median level of “disposable income” for that same group. As a consequence, the inability to “save” has continued.

We don’t disagree with Citi’s conclusion that the savings rate can keep on falling. However, we strongly disagree that it’s a function of “healthy consumer metrics”. In contrast, it’s a horrendous reflection of the creeping erosion in living standards across the broad swath of the population.

 

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saldulilem's picture

Gotta have that iPhone X

FreeEarCandy's picture

2 things I don't like. Phones and mail boxes. 

Clint Liquor's picture

US Corporations are in no better shape than consumers. Highest debt to net assets ever, over 50%. IMF says even small hike in rates causes default in 20% of them.

Handful of Dust's picture

Obamanomics:

1) joblessness due to Obama and his buddies like Immelt sending millions of jobs to Mexico, Bangladesh, China, etc;

2) Obamacare broke the middle class back;

3) oppressive government regulations crushed small businesses.

 

"I fundamentally changed America!"

~ Hussein Barrack Ahkmed bin Bama

eclectic syncretist's picture

The Federal Reserve and its board of directors are directly culpable for the low savings rate because of their ZIRP. They should be tried and jailed for their traitorous stupidity and incompetence.

GunnerySgtHartman's picture

A plummeting savings rate is exactly what TPTB want.  Think about it:

- The Fed wants people spending rather than saving, so it cuts interest rates to record low levels and keeps them at those artificial lows for years on end to get people to drain their savings accounts.

- Banks want people spending rather than saving so they can create more debt slaves, not less, and so they don't have to pay interest on savings accounts (that issue is partly taken care of by the Fed, see above).  Banks don't make money when people are saving money!

- State and local governments want people spending rather than saving because increased spending means more tax revenue (sales taxes, property taxes, excise taxes, etc., along with other taxes and fees associated with big-ticket purchases such as houses and cars, etc.).  The US government wants people spending for the same reason, although the US government doesn't collect things like sales taxes and property taxes.

Just follow the smell of money!

Bwana's picture

Unfortunately you overlook a few obvious counter points. Retail sales are down, auto sales are down, gasoline sales are down, restaurant sales are down and those you refer to as debt slaves are broke and living hand to mouth. The latest figures put 78% of households unable to cover a $400 surprise debt. That average household has $16,000 of credit card debt and 85% of them can only make the minimum payment. Real wages have not increased since 2000 and prices have increase over 40% regardless of what the government lie is this week. The economy is imploding. I was in Sams on Sunday and watched the people at the meat counter. They had some very nice spencer steaks cut and people would look at them and then look at the price and walk away. You could see they wanted them but the price was too high for them to pay. The people do not have any money to save that's why the rate of savings is down. If this keeps up we will all be happy just to have beans and rice, and we can thank Obama for sticking it to us.

FreeEarCandy's picture

So Citi’s analysis is putting lipstick on an empty piggy bank.

saldulilem's picture

But, but ... it's good for the GDP?

SerfsUp's picture

End the F'ing Fed. That is all. 

starman's picture

"Consumption" ?! How about inflation exceeded income growth! ?

Ivan de beers's picture

One day the consumers are "broke" and the next day consumers have money and are better off than before last crisis "inclined to increase spending". Starting to sound like Trump with the flip flops. But yeah we'll say whatever keeps the market going up 

To Hell In A Handbasket's picture

What else can Citi say? The Emperor has no fucking clothes, so we must all pretend. It's called Hypernormalisation. USSA debt clock? lets pretend it can be paid back. Unfunded liabilities? Just borrow more, kick the can down the road and let our children sort it out. Trump and MAGA? lol 

The FED is the first enemy that needs vanquishing and no president since JFK, has even broached the subject seriously. The FED is just left alone to steal, plunder, wreck havoc and steal some more for the chosenites.  I've got friends who are just about treading water and they are what you would call middle class. Everything is a charade.

Shares at an all time high, yet pension funds are broke? The disconnect is visible if they look for example, at G.E historic share price and G.E having to cut dividends by 50% this week. Our so called economists are nothing more than liars, charlatans and gatekeepers, who keep the game going with lies built upon lies.

JoeTurner's picture

Who needs savings when we can all buy bitcoin !

brushhog's picture

Think about it like this for a moment; The term "saving" is a bit disingenuous. Why is it that if I store my wealth in dollar bills, I am "saving" but if I store my wealth in property, art work, gold bullion, stocks, timber, or toilet paper I am "consuming"?? Whether I have a million dollars in the bank in a savings account stored in dollars, or I have it in a house with an ocean view...I still have the exact same amount of wealth. If its stored in the bank they call it "savings". It doesnt matter ( for this dicussion ) where I store the million. Now different assets store wealth in different ways, and how they behave can change over time.

People "saved" when money held its value either through a gold standard or a viable rate of interest. Dollars ( in fact all fiat currencies ) are no longer a prudent long term store of wealth. So it is logical that people would choose to store wealth in other ways.

Another manifestation of this thinking is the concept of a customer/business relationship. If I store my wealth ( time, effort, capital ) in pieces of lumber and you store your capital in dollar bills, when we meet to trade YOU are viewed as the "customer" and I am viewed as the "business" and we are afforded completely different rights and viewed differently. This is completely wrong. In fact, we are simply trading lumber for dollars. The fact that I have lumber and you have dollars is no different than if you had iron ore or potatoes or toilet paper to trade for my lumber. We are equals meeting voluntarily to trade our goods for mutual benefit, there should be no special class of person based on what goods he brings to the trade. But people have this idea the "money" is something special and goods are not. In fact, if you couldnt trade your dollars for goods you wouldnt want them at all, they would be worthless so in reality it is the GOODS that have value not the pieces of paper that we use as the medium of exchange. Its like valuing the token more than the subway ride.

FreeEarCandy's picture

Excellent explanation. The only problem I have with it is entropy. Tomatoes rot faster than paper.

brushhog's picture

Paper depreciates faster than lumber can rot, or gold can tarnish. You wouldnt store your wealth long term in an asset that is perishable in the short term.

FreeEarCandy's picture

I also would not store my wealth long term in something that is not universally convertible for convenience purposes. Hence, cash and gold. Bitcoin is still not readily accepted so at this time it cannot be included in the list of convenience.   Convenience, in and of itself has value, as it is directly tied to time, and time is tied to money/value /wealth.

Delving Eye's picture

Correct. A house on the water may have intrinsic value for the homeowner, but is a losing proposition in a rocky economy. Plus, there's all that maintenance and property tax that require (and drain) hard-earned cash.

CRM114's picture

There is a special class of people based on goods and services - those who trade essentials and have a monopoly/cartel.

Why else do you think healthcare costs have gone thru the roof?

 

Bemused Observer's picture

You're right brushhog, and I agree. One 'stores' their wealth in whatever form works for them, and the cash buyer is really just another trader bringing his particular 'goods' to the trading table. People start to see it when their currency devalues sharply and they have to start buying stuff...now 'face value' is just a MSRP and they must scramble. And sometimes no one else at the table even WANTS your currency...uh oh!

But TPTB must have numbers to attach to those goods, in order to tax them. So they need a numerically-valued currency, and must value everything according to that currency in order to generate the tax bill. Which will be paid in that same currency, again, easy to calculate with a number-value. It is government that needs, and benefits, from official 'currencies'. And the weak-minded who draw comfort from larger numbers as a gauge of value for the stuff they have. When you are unsure of value, or of even HOW to value something, you focus on price.

But we all must bring something to the table, and it must be something the other traders want or we will not be trading that day.

BritBob's picture

Banks are always quick to pass on increased rated to lenders but watch what the competition does before raising rates. Profits before people. People need to switch accounts.

FreeEarCandy's picture

If the government taxes at the rate of 50% when all is said and done , then there is an old tried and true method that will guarantee a 50% increase in tax free earnings that is more anonymous than bitcoin, gold, or any other investment. There is absolutely no paper trail, conversion fees, broker fees, etc fees. It is also almost risk free.  Its called bartering. Saving 50% on any amount of money is huge and such investments will not evaporate in the blink of the eye due volatility in the markets. Not only will one save 50%, one will also form strong bonds with the people one barters with. There is also the accounting fees and time saved reporting income. Stop using their instruments of destruction when ever possible. Ask people you trust if they are willing to barter. The worst they can say is no. If they say yes you are both guaranteed  winners and will instantaneously increase the wealth generated by 50%.   

J J Pettigrew's picture

For every Action, there is an equal and opposite REACTION.  The Fed doesnt know this. It is not in their theories.

Low rates....below the norm...below inflation....for 9 years...

Well, you get no savings and higher borrowing and debt.....

Why arent questions asked of the Fed, regarding this, during these "dog and pony" hearings ?

 

CRM114's picture

Whose side do you think the media are on?

CRM114's picture

The data presented is wholly misrepresentative of the true situation.

Debt service ratios are based on estimated net income, but have to be paid from disposable income. Given the large (and also under-reported) inflation in many expenses, such as food and medical, disposable income is significantly lower, so the DSR is higher.

Net worth is largely based on property valuations, which have others have noted are both in a bubble and highly dependent on the interest rate remaining near zero.

Stock market valuations are way beyond any economic justifications. Add in low interest rates and the valuation of large proportions of pensions is way over-estimated. In simple terms, pension payments down the line will be much less than people have been promised. This means the requirement for non-pension savings is much higher.

The reason these data look good is because the parameters that make them up have been chosen and massaged to make them look good. The underlying problems have not been addressed at all. And, indeed, can't be until the data parameters are chosen to match reality. Anyone believing them doesn't talk to real people. 

sister tika's picture

Citi asks “Can the savings rate keep falling?”. Citibank is really going out on a limb here. They could be wrong. Maybe.

The starving, insolvent, unemployed American populace is very unpredictable ya know, so anything could happen.

A. Boaty's picture

Financial repression puts downward pressure on the savings rate? Who knew?

Kidbuck's picture

Obama care wiped out all of kidbuck's savings over the last year. My budget just couldn't absorb $500 a month increase in health insurance premiums. I once had hope that Trump and congress would repeal Obama care and make life affordable again. After all, they both promised to repeal it. Instead they fucked the middle class again, and again, and again.

And on a related note, there is not a single American born doctor in all of central Florida. I suppose few American born doctors want to work for Medicare wages?

Bemused Observer's picture

Think about it a bit kidbuck. No American doctors...do you really think it's because of 'low pay'? Name ONE medical specialty whose practicioners are currently earning 'low pay'. I daresay most Americans would love to have that income, even after the ACA.

Obviously it can't be because of 'low pay'. Since these are foreign doctors, I'd look first to abuses of the H1b program by the corporate entities hiring the doctors for answers. Then move on to the AMA and their practices, which set limits on doctors and enforces monopolistic holds on who is permitted to have these jobs. Then to the medical schools and their gouging and debt-slavery for those lucky enough to get that far, and the insurance companies and their 'malpractice' policies.

Then you get to the government, and all of its demands, and you can see that it isn't the pay at all, which is actually quite good for an American job. It's all the OTHER bullshit that goes with the job, and the fact that it is a government-enforced monopoly.

RedBaron616's picture

No, doctors aren't being brought here by H-1b programs. They come here because they can make lots more money in America than in their home country. Simple as that.

Bemused Observer's picture

Well, however they are getting here, the dynamic is the same...the foreign ones end up taking the jobs because they can afford to undercut the pay of the domestic ones. And since the market is so tightly controlled by the AMA, an individual entrepreneur doctor has few options that will allow him to practice outside the medical 'ecosystem'.

ThisIsMadness's picture

I like to call it "inflation." 20 years ago I lived in an efficiency apartment by myself, had a car payment, and partied on the weekend making $8 an hour. You can't do that anymore; even at $15. 

3-fingered_chemist's picture

Congress and Trump want to cut taxes when that's not even the problem. They should be trying to address cost of living which means government would have to actually cut spending and downsize. Cutting taxes will just make the problem worse since everyone knows it will cause the annual deficit to increase meaning more monetization of the national debt (i.e. increase in cost of living). 

I laugh at these projections that say it's gonna cost x dollars over 10 years and removal of this deduction will "save" us y dollars to offset it. .gov cannot even delivery the mail without losing money and people trust them to make these kind of calculations with any accuracy? 

I mean everyone knows that SS and Medicare are completely broken programs and need to serious reform yet every Congress just sits on their hands hoping it doesn't blow up on their watch. Thanks, assholes.

RedBaron616's picture

High taxes are certainly part of the problem. Every dollar the government takes from me is money that gets wasted in the ratholes of government as opposed to rippling through the economy.

High taxes are part and parcel of the high cost of living.

Consuelo's picture

 

 

If people began to save in earnest - say like the standard old saw of '10%', the economy as we know it right now would crater.

All discretionary-spending aspects of the economy would adjust-down.

 

aliens is here's picture

Hard to save when you work 2 part-time jobs.