Wednesday, July 1, 2009

The savings rate

The US personal savings rate might be the key indicator to tell us when the economy is at the bottom. Basically the savings rate needs to increase from its bottom of about zero in 2006 to its historical average of around 8%. In fact it may need to stay above 10% for a few years to rebuild much of the wealth that was squandered over the past decade.

So here is the data from the government's Bureau of Economic Analysis (BEA).

The good news is that we almost half way there. The bad news is that this is probably incorrect. Trim Tabs, an independent economic research firm says that the BEA data is flawed for a few different reasons. The main reason is that the BEA uses income data that is six months old. The real time data that Trim Tabs uses shows that incomes have been falling rapidly over the past few months. So the savings rate is actually more like 0.9% and not 6.9%. In other words, we haven't made any progress on saving. This is Irving Fisher's "paradox of thrift" in action. If everyone tries to save at once, incomes fall even faster and no one makes any progress on reducing their debt burden. That is probably an over-simplification but the point is that it does not appear that American's have made much progress on repairing their balance sheets. It does not appear that spending is reaching the bottom. Keep in mind that consumer spending accounts for roughly 70% of the US economy. Another 10% decline in consumer spending would take another 7% out of GDP. This doesn't bode well for an economic recovery any time soon. In fact we may only be half way through this recession.

trimtabs BLS