The Saving Problem
New personal income and spending figures for October were released this morning. The BEA reports a headline figure of a 0.6% increase in income and a 0.7% increase in spending, both of which are quite high.
Unfortunately, there are a couple of problems with the report, too. Much of the increase in income and spending was eaten up by higher prices, so real changes in income and spending were just 0.2% and 0.3% respectively. Also, only about half of the increase in personal income was in the form of employee compensation; the rest was income to businesses and property-owners. Such income gains are no less real than increases in employee compensation, but this pattern does suggest that we are still not seeing as much of a broad-based increase in income as might be expected at this phase in the recovery.
But the most striking thing about the report to me is the continued evaporation of saving by Americans. The personal saving rate fell to just 0.2% of after-tax income in October. That means that an average family that earns $75,000 per year, with take-home pay of about $5,000 per month, is saving about $10 per month. That’s it.
The chart below shows the trend in savings in the US over the past few years.
This low savings rate is one of the two primary contributors to the US’s massive current account deficit (the federal budget deficit is the other culprit). In order to shrink the US’s current account deficit, one of two things must happen: business spending must fall, or this savings rate must rise, and rise significantly. (Yes, I’m assuming that the federal deficit won’t fall any time soon.)
So my question is this: can we realistically imagine the household savings rate rising substantially on its own, i.e. without any major shocks to household finances? A gradual, independent rise in household saving would help to bring about a smooth end to some of the worst of the US’s current financial imbalances. Such a transition is probably what Alan Greenspan has had in mind when he has talked about a smooth and natural resolution to the US’s current account deficit.
But personally, I’m skeptical of such a scenario. Low savings rates during the late 1990s and into 2000 were justified, it was argued, because of the rising value of household stock portfolios. Low savings has been justified (at least according to the non-savers) so far in this decade because of rising home values. But if those are really the reasons for low savings rates, then such logic indicates that savings won’t recover until the asset price bubbles start to unwind. In other words, household finances will have to be pinched in a painful way before Americans are prompted to save more and spend less.
Such a painful pinching is exactly what a currency and financial crisis in the US would precipitate. And unfortunately, that is exactly why it seems increasingly likely to me that it will take such a crisis to resolve the US’s financial imbalances.