2009Jun11 Saving More
2009Jun11 Saving More
Saving In, Spending Out
There is an old cliché that says “you can’t turn a battleship on a dime,” meaning that some things—be they business plans, government programs, or even wars—are so big and have such powerful inertia behind them that it is impossible for them to stop or change direction quickly.
We would have argued that the national savings rate also fell into this category. After all, Americans have been on a spending spree for more than thirty years. Savings as a percentage of disposable personal income peaked at 14.6% in 1975 and has trended down almost uninterrupted until hitting 0% during the 2000s (and briefly dipping below 0% in 2005!).
Towards the end of 2008, as the world slid into crisis, Americans began to save again and did so in a hurry. Starting in the fourth quarter of 2008, the savings rate shot up from near zero to 5.7%—in the span of only six months. It appears that American consumers can turn a battleship on a dime.
HS Dent research suggests that the recent increase in the savings rate is no one-off event. The speed with which the increase occurred is not likely to be repeated, as this was the result of a paralyzing financial meltdown. But the overall trend of less consumption and more saving is likely to continue due to durable, fundamental reasons. Let’s take a look at what the New York Times has to say about this:
By Floyd Norris
For the first time since World War II, Americans are spending fewer dollars than they spent a year earlier. That reluctance — or inability — to spend has led to the sharpest rise in the savings rate in this country since the government began calculating the statistic in the 1950s.…
Mr. Rosenberg, [chief economist and strategist of Gluskin Sheff] said he expected that the savings rate, which rose to a 14-year high of 5.7 percent of disposable income in April, would continue to grow until it surpassed the record high of 14.6 percent, set in May 1975, when the country had just emerged from a severe recession and Americans were pessimistic about the country’s economic outlook.
We would agree with Mr. Rosenburg and would add one important clarification. It is not because of consumer pessimism that we would see the savings rate trending upward and remaining high. It’s demographics.
Throughout their lives, the Baby Boomers have done everything big. Due to the shear size of the generation, the Boomers have an outsized impact on the economy. It was largely their free spending that sent the savings rate to 0%. We believe that this massive generation will now save with the gusto with which they once spent.
And what might the consequences of this be?
Leon Levy, the billionaire co-founder of Oppenheimer Funds, estimated in his 2002 book The Mind of Wall Street that every percentage point gain in the savings rate would lead to an 11% decline in corporate profits. Whether or not the relationship is exactly this precise remains to be seen, but Mr. Levy’s rationale is solid. Every dollar saved is a dollar not spent. And in an economy that is 70% consumer spending…that adds up to a lot of dollars.
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