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.