JPMorgan Makes A Striking Discovery: "The Wealth Effect Is Dead"

Last week we highlighted that in the latest comprehensive revision to the national accounts data, the personal saving rate in 1Q18 was revised to 7.2% from a previously-reported 3.3%, with the entire series similarly shifted higher in the post financial crisis era.

What caused this dramatic revision? As Macquarie's Viktor Shvets wrote earlier this week, the largest and most persistent revisions occurred not in compensation but in proprietary & investment incomes. In other words, for the bulk of non-supervisory employees (over 80% of labour force), there has been (at best) only limited change. However, proprietary incomes were raised by ~8%-10% throughout the last three years. The same occurred to rental and investment income. In essence, Shvets notes, "this is another side of rising income & wealth inequality, and when estimates are updated for ’17-18, it presumably would imply an even greater difference between mean and median incomes."

But whether the dramatic revision in the savings rate is accurate or merely the figment of some BLS excel spreadsheet's imagination, there is another - more troubling implication.

Recall that as Ben Bernanke explained many years ago when he was actually telling the truth in a November 2010 WaPo Op-Ed, the whole point of QE was to boost the wealth effect, which is simply defined as the tendency of households to spend some fraction of an increase in net worth.

Together with the Phillips curve, in the years  prior to the great recession, the wealth effect was thought to be one of the more reliable regularities in macroeconomics: when household wealth increased by a dollar, consumer spending would increase by 3 to 4 cents and the saving rate would go down commensurately.

And indeed, as JPMorgan's Michael Feroli points out, when one overlaid the saving rate against the wealth-to-income ratio there was a reasonably solid correlation. However, beginning in 2014 - some 5 years into QE - we started to notice that the post-recession wealth effect was losing its power to explain saving behavior. In spite of a roaring  stock market, the saving rate barely budged in the early years of the recovery.

So fast forward to the latest savings rate revision, when as JPMorgan writes, "the wealth effect looks even weaker" because had pre-recession wealth effects played out in the current expansion, the saving rate would be predicted to be 2.0%; the latest upward revision places the data even further away from that prediction.

It gets worse, because when the bank runs those same models since the end of the recession, "they indicate that the wealth effect has disappeared completely", Ferolid concludes.

Of course, ten years after an unprecedented monetary experiment that was launched only to boost the wealth effect, it is easy to come up with explanations why the wealth effect has disappeared in the current expansion, and that's what JPM tries to do:

there was probably some scarring effect of the Great Recession that altered behavior. That behavior may have led to a pokier pace of growth in this expansion—had the saving rate actually fallen to 2.0% the average pace of real consumption growth in this expansion would have been about 0.5%-pt per annum faster on average

Whatever the explanation, the implication - assuming the latest revision is correct - of the surprisingly higher savings account revision is troubling: Americans simply no longer feel compelled to spend. And in an economy in which 70% of the economic growth comes precisely from consumer spending, this may explain why a decade into what will in 2 weeks be the longest bull market on record, there has been no actual recovery, but merely $15 trillion in central bank liquidity filling in the cracks and giving the impression of a recovery, even as households braced for the great recession - or depression - that will inevitably follow.

Echoing JPM's observations, Macquarie's Shvets writes that while higher savings might indicate that households were not dipping into their savings to maintain consumption, the caveat of unequal distribution and breakdown of asset-based economic model takes a lot of wind out of this argument. Since ’80s, strong & negative correlation emerged between HHs net assets and personal saving rates, as shown in the chart below.

And another observation on the death of the wealth effect, this time from Macquarie:

Higher net assets relative to income meant that people did not need to save. This in turn boosted growth, with rising asset prices underwriting excessive consumption. However, following revisions, personal saving rates have apparently not dropped as net wealth increased.

So why is it a problem? To Shvets - as to JPM's Feroli - it implies a rising propensity to save and that wealth accumulation is no longer translating into usual boost to consumption. As a result, higher saving rate means that whether for financial, demographic or other reasons, LT growth rates would be lower, and the Fed, which was hoping for a rise in neutral/natural rates, might need to accept a far lower trajectory.

By implication, this would also mean that the elusive r* (the inflation adjusted rate at which economy operates at its full
potential) would need to continue to fall. That's hardly a surprise:

As global economies financialized, r* has been dropping for three decades. Estimates indicate that it is now close to zero or negative in the US, Japan & Europe (vs 3%+ in ’90). The challenge with low r* is that it limits efficacy of monetary levers, reduces growth & lowers asset returns.

This in turn may help explain why most central banks are so focused on escaping the liquidity trap and the confines of the zero-lower bound (not to mention QE). And all as a result of household willingness to be better financially prepared for the next crisis. 

Finally, Shvets observes that "higher US savings might also force very disruptive realignments in surplus countries (e.g. China, Germany)." While this would please Trump; his desire for high consumption, rising fiscal spending, current account surpluses, tariffs, and low US$ are all mutually incompatible.

Macquarie's, and perhaps JPMorgan's, conclusion now that the wealth effect - the official impetus behind a decade of unorthodox monetary policy and trillions in liquidity injections - is dead: "Prepare for a lot of turbulence."


Clock Crasher Fri, 08/10/2018 - 17:31 Permalink

I just want my UBI and free shares of Amazon. 

One vast and ecumenical holding company, for whom all men will work to serve a common profit, in which all men will hold a share of stock. All necessities provided, all anxieties tranquilized, all boredom amused.


monad Fri, 08/10/2018 - 17:44 Permalink

This was apparent in 1977. What, are you looking for a plea bargain?

You all deserve to be executed. You know who you are.


Endgame Napoleon onwisconsinbadger Sat, 08/11/2018 - 09:59 Permalink

You must not be very womb-productive. That’s where the trickle down is. It trickles down based on sex and reproduction, but only for the womb producers, not for their suppliers. I am running for congress on a platform of gender-neutral child tax credits that reward the sperm production of citizens, legal immigrants and illegal aliens. As a non-income-tax payer, you will even get progressive-tax-code credit for just trying to impregnate someone, as womb production—according to all politicians and economists—is the main driver of the economy. 

Note: These are the available pay-per-birth freebies for the mommas:

~ Free EBT food at $450 per household on average; 

~ Free rent in Section 8 housing or reduced-cost rent in mixed-income complexes, which are in nicer, safer areas of cities than most single, childless citizens with a college degree can afford;

~ free electricity; 

~ monthly cash assistance in the same amount as the EBT that increases per birth that falls within the time restrictions; 

~ nearly free daycare so that moms can work part time, staying under the income limits for welfare, plus the recent added daycare assistance from the Omnibus Bill;

~ refundable child tax credit up to $6,431 for mommas to spend as they please;

Since mommas get all this pay for sex and reproduction, you’d think that not only would they have produced the biggest generations in US history—the Millennials and the Gen Z—but that the economy would be uplifted by their womb production and spending as economists claim. 

Instead, by dis-incentivizing hard work for the rest of the population, while supporting this fake-feminist womb-centric vision of the working mom with multiple layers of free stuff, we have these stats: 

~ 101 million US citizens out of the labor force 

~ 78 million gig pieceworkers 

~ 42 million employed-in-name-only—but womb productive—citizens and noncitizens who qualify for EBT and many other pay-per-birth freebies that hoist up their pay from part-time / “voted-best-for-moms” jobs that keep them eligible for EBT


In reply to by onwisconsinbadger

arrowrod Fri, 08/10/2018 - 17:54 Permalink

Did anybody understand this gibberish? I save 20% of what I make, always.  I invest in Stawks.  I don't do bonds.

I think owning (being owned by) a 6000sq ft house is insane.  

I understand you ain't "expletive deleted" unless you are invited to cocktail parties in DC and NY.  In my opinion, the cocktail parties are like a charity f***.  You're used and abused.

Endgame Napoleon arrowrod Sat, 08/11/2018 - 10:07 Permalink

Good for you. You must either have a successful business, or you majored in one of the few areas that counts, getting a degree that actually has market value. Smart. However, everyone birthed and put on this planet is not talented in the few areas of work that employers value. Well, employers tell you they value high sales numbers, pumping you up to get you to sell more, until the manager’s bonus is big enough to churn you and move on to the next hardworking chump. 

In reply to by arrowrod

Kayman Fri, 08/10/2018 - 18:13 Permalink

Printing money and handing interest free loans to your kind via the Fed?

To those that have to pay the tab when the party is over, it is called the Poverty Effect.

Blankfuck Fri, 08/10/2018 - 18:18 Permalink

Here kity kity kity scumbag fed reserve....Here kity kity kity scumbag fed reserve....

You got those banker friends fat with cash, along with the CEOS  but you left the real deserved broke with debt to you banktards. Unfortunately we cant eliminate you fucktards. Its not politically correct and illegal to do so to slime like you. 

For all those on the inside and who collude and took the printed  ponzi money from the pig reserve, I really hope you go to hell along with your brat pig families. 

ah-ooog-ah Fri, 08/10/2018 - 18:37 Permalink

With long term interest rates close to zero, we need to save ~50% of our incomes into pensions unless we want to drop dead at the office.  Kiss goodbye to the consumer economy.

Endgame Napoleon ah-ooog-ah Sat, 08/11/2018 - 10:14 Permalink

Oh ya——

Take-home pay: 

  • $2,000 per month if lucky
  • $1,600 per month if unlucky  

Rent for a crappy one-room apartment: 

  • $900 per month 

If you save half of the good-scenario wages, after paying rent, you have $100 per month left over for the following bills: 

  • groceries 
  • gasoline
  • car note
  • car insurance 
  • electricity 
  • phone 
  • clothing 

In the worst-case scenario, after covering rent, you start paying for the above expenses in the hole. 


In reply to by ah-ooog-ah

DaNuts Fri, 08/10/2018 - 18:38 Permalink

Money is worthless to Bankers, the interest rates are a good indication of that.

If it was worth something then they would give you a return on your deposit.

numapepi Fri, 08/10/2018 - 18:42 Permalink

If JPM came up with this... you can bet they have a gimmick.

I noticed however, the charts didn't break down savings by earnings. Is it possible the savings rate has been driven up by the wealthy?

Plus you mention the Phillips curve?!?!?!? That old theory was proven wrong in the 1960s!!!

666D Chess Fri, 08/10/2018 - 18:43 Permalink

The wealth effect is more alive than ever, the only thing is that it works in the opposite direction to what these criminals that should get hanged from the testicles tell you. The wealth effect is a wealth transfer from the middle class to the ultra rich. 

Endgame Napoleon gwar5 Sat, 08/11/2018 - 10:22 Permalink

Give more sex-and-reproduction tax credits to the womb-productive citizens, legal immigrants and illegal aliens, working part time to stay under the income limits for monthly welfare. They already get a ton of it. Give them more!!! That’ll pump up the portfolios of those small retail investors. The massive number of US citizens out of the labor force, un-buoyed by all of the pay for womb productivity from .gov, do not have the money to keep spending to beef up the consumption-based economy, and we know that hard work does not pay in this welfare-rigged economy.

In reply to by gwar5

I Write Code Fri, 08/10/2018 - 18:59 Permalink

Doh!  Waitaminute.  What if the savings rate is NOT an inverse to consumption?  What if those who received more money, received SO MUCH more money that they could BOTH save more and consume more?  And it's only the other 99% who suffered? 

Would J.P. Morgan ever talk about that?

Balance-Sheet Fri, 08/10/2018 - 19:06 Permalink

It is easier to live in the past but many of these old "Rules of Thumbs" are no longer valid because new circumstances have rendered them obsolete. The Wealth Effect and the Phillips Curve are dead.

The first true microprocessor came out in 1971 and took about 30 years to get a SOLID grip on employment related industries and around 2004 we entered this Information Revolution/Economy and it is a very real transformation possibly greater than the one 1815-1830 when machines really began to perform.

Academic hacks and their followers simply refuse to accept this and insist/demand that the Golden Age -whatever each thinks that was- will return and it will not because human labor is too expensive vs. the price if done by machines and the price of machine work can only fall *almost* endlessly never quite reaching zero.

Productivity growth is poor because we have way too many people still working in all developed economies. They have limited skill sets, low energy levels, limited trainability, and sub optimal attitudes while also being very very expensive to compensate, manage, and administer.

That economy 1950-1985 or whatever you like - that is gone.

Balance-Sheet I Write Code Fri, 08/10/2018 - 19:36 Permalink

You see it clearly. We could perhaps increase the ratio of PhDs in certain STEM related areas within a given workforce total say within the USA. These would be computationally supported restructuring specialists working to streamline complex interrelating systems.

Such a specialist will direct the highly capable computer to examine certain possibilities or to look deeper into possibilities the machine wishes to initially marginalize. 

If politics were not interfering in certain operations now like the banking system the number of US employees could be reduced by, maybe, 300,000 this year alone. It is this terrible overhang of value destroying labor that is hobbling the big banks with DB being one of the most egregious examples in Europe.

If we simply assign people to make work jobs and they do not go berserk from the futility then productivity will slide to zero then go into reverse and the economy sinks into endless depression. We have a lot of experience with this even in Europe for more than 1000 years as Rome declined in the West from about Year 400 to the 1800s when the metal industry finally recovered. Productivity scarcely moved century to century. We also have the 20th Century record of the Marxist/Socialist/Communist states that also gradually grind to a halt.

Please keep thinking about these related issues in a forthright manner working from what you actually think will happen not what you hope will happen.

In reply to by I Write Code

Endgame Napoleon Balance-Sheet Sat, 08/11/2018 - 10:40 Permalink

And why do we have too many people working? I’ll tell you why: Moms today are accommodated to the endth degree to avoid doing the work of raising their own children. Government even pays low-wage daycare workers to do it for some women, while they absurdly work part-time jobs at even lower wage levels than the daycare attendants. They stay under the income limits for welfare that covers their major household bills and refundable child tax credits up to $6,431 by working part time. Then you have your bored-with-their-kids moms, with husbands who make plenty to support the household in style, taking the low-wage jobs in posher, safer areas of town. They leave at 2:30 every day, heedless of phones ringing off the hook with paying customers, and for weeks of baby travel soccer, etc. Then we have the assortative-mate parents, keeping two breadwinner jobs with benefits made possible by a $260-billion tax exclusion for their enployers, under one roof. They have halved the size of the college-educated middle class. They are “the talent,” yet in many cases, the talent sure can be away from work a lot. Usually, when your talent is so essential, you are needed at work. Why, then, are many in “the talent” category on 9 two-week babyvacations per year, in addition to PTO and pregnancy leave? All of these working parents in the crony-parent or “voted-best-for-moms” jobs, with spousal income or pay-per-birth income from .gov, are above firing in their crony-parent jobs. All evidence suggests that their excused, crony-parent absenteeism is made possible by machines that perform more of their work. This also explains how they have time for the all-important mom-bonding rituals at work, like baby-mommy-look-alike-bulletin-board-decorating contests, Halloween dress-up days, tacky Christmas sweater contests, family day parking-lot picnics, spin-the-wheel contests, bring-baby-to-work days, etc. It really becomes clear in jobs where quotas are not met, month after month, on top of the crony-mom absenteeism, yet the mommas with unearned income from spouses, ex spouses or welfare & child tax credits that pays their main bills, making the low wages acceptable, are retained. Other than raw (and corrupt) cronyism, what other explanation could there be? 

In reply to by Balance-Sheet

BANKERS-WE ARE… Fri, 08/10/2018 - 19:18 Permalink


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ElTerco Fri, 08/10/2018 - 19:48 Permalink

In other words, wealth concentration. No shit, Sherlock. The C-suite is gobbling up all the wealth and sitting on it. Their spending might be 5x a middle class family, but that is in no way enough to keep the economy healthy. Stop hoarding the money, and instead pay the employees, you know, the ones who are actually working.

Canadian Gal Sat, 08/11/2018 - 05:22 Permalink

If Trump was hoping for higher consumption to cause a boon in tariff money coming in to cover the debt he's creating, he's likely to be very disappointed.  In fact, his policies are likely to result in the exact opposite effect the same way higher interest rates changed shopping attitudes in the 80's.....garage sales and second hand shops sprung up everywhere and were heavily supported, and as stores went bankrupt, liquidation stores thrived creating an endless supply of cheap goods for people.

At this juncture, there's already a flood of second hand things coming onto the markets.  But in the same way Trump didn't know you don't need to show ID to buy groceries in North America, he and the rest of his elite buddies are too out of touch to realize that people his age and younger have been steadily selling their 3 to 6 bedroom homes they built after their kids moved out, and selling off rooms full of barely used possessions in garage sales, etc.  As this trend increases right at a time when Trump makes retail goods more expensive, the end result is likely to look like the 80's.  Any money saved by buying second hand is likely to go towards paying off debt/mortgages or into savings, which in my view is a good thing.

Endgame Napoleon Canadian Gal Sat, 08/11/2018 - 11:07 Permalink

It might be good for the same people he gave another womb-productivity-based tax cut to—dual-earner parents—but I doubt that it will help the far greater number of US citizens who are single and childless or single with no children under 18. Working parents certainly do have a lot of money to spend on extra, barely used goods, just like they have a ton of money (and time off from work in their crony-parent / above-firing jobs) for vacations.

But they are not the majority in this country; single people are the majority in the USA. Those of us who are not single parents with kids under 18 have one earned-only income to cover all major household bills, which do not fall under the category of things-you-can-purchase-at-garage-sales. The argument that cheap, second-hand goods reduce major expenses is like saying cheap plastic containers, cheap toys and cheap jeans Made in China offset rent that soaks up over half of your monthly wages. 

We, in the majority, have zero unearned income from spouses, child support or free monthly bills from .gov, plus up to $6,431 from the progressive tax code, to reward us for sex and reproduction. Except in the few cases where startup capital for self-employment is available, our employment prospects are limited to this welfare-rigged crony-parent job market, with its many openly discriminatory “diverse” “voted-best-for-moms” jobs. 

In reply to by Canadian Gal