Saving Us with US Savings

In general, there are two things you can do with your money -- spend it or save it. Money that is saved is generally channeled into investments, either directly as in the individual buying of stocks, or indirectly through banks and other financial intermediaries.

The Graph below shows the personal savings data for the U.S. as far back as the monthly data is available. From the late 1950’s through the mid-1980’s, U.S. consumers would generally put away between 8 and 10% of what came in (mostly pay checks, but the data is based on all disposable income). During boom times, it would be towards the low side of that, and would spike higher during recessions, occasionally going as high as 12% or so.

We then went into an extended decline, until the savings rate actually briefly went negative a few years ago. Since the start of 2005, the savings rate was almost always below 1.0%. Keep in mind that the absolute dollar savings data are not adjusted for inflation.

In 2008, it looks like that started to change. The big spike in May to 4.8% was due to the stimulus checks (remember those?), but even after that effect wore off the savings rate has started to rise. This is, of course, the flip side to the slowdown in spending we have been seeing -- a point driven home yet again today with another month worth of dismal auto sales numbers.

However, even with the rather dramatic slowdown in spending, the savings rate in November was still only 2.8%, which was about the normal rate from 1999 through most of 2003. Since most people's wealth has been destroyed through the decline of housing and stock market values, people are going to need to save much more if they hope to retire or send their kids to college. That "we will sell the house and move to a smaller place and live off the proceeds" plan is just not going to fly anymore. The 401k that you were relying on is now much more like a 201k.

People are going to have to save the old fashioned way -- by spending less than they make. That means a new car every seven years, not every three years. Clothes should properly be reclassified into durable goods from non-durable (I know I have stuff in my closet that probably dates from the Reagan administration -- heck, it may even be in style again by now).

All the pain of this slowdown in consumer spending has only really moved the needle by about 2.0% points so far. It strikes me as likely that we will eventually have to return to savings rates like we saw in the 1960’s and 1970’s. That is not going to be an easy process, since as everyone starts to save more, it means that everyone consumes less. That means fewer jobs and hence less income, and with less income it is harder to save. With a higher marginal propensity to save, the multiplier effect from the stimulus package will be much weaker.

The process has MUCH further to run. Avoid retailers like Macy’s (M - Analyst Report), Kohl’s (KSS - Analyst Report), Home Depot (HD - Analyst Report), Sears (SHLD - Analyst Report) and JC Penney (JCP - Analyst Report), along with those who make the goods that those retailers sell.



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