There was good news buried in the GDP report released last week. Based on large revisions to previous data, the U.S. savings rate is now above 6%. This level of savings makes sense in a world where U.S. consumers are presumably engaged in repairing their balance sheets by paying down debts and increasing their savings. While most economists will agree that increased savings is a positive for economic growth over the long-term, over the near-term it has the unfortunate impact of reducing consumer spending. Hence…the paradox. While it makes financial sense for any one of us to live within our means, spend less, and save more, if all of us decide to save more at the same time, it is a strong headwind to economic growth. After all, consumer spending represents about 70% of U.S. GDP. It would make sense that a dramatic increase in savings should be correlated with a decrease in consumer spending. Of course, consumer spending has its share of other issues to contend with, including high unemployment, low consumer confidence, record high mortgage foreclosures, record high amounts of income from government transfer payments, etc.
However, it seems to me that the bullish argument here is clear. You would have expected that higher rates of saving would have an impact on the top line growth of corporate earnings, but so far that hasn’t been the case. While retail sales haven’t torn the cover off the ball, they seem to be at least hanging in there for the time being. A recent Bloomberg/BusinessWeek cover story talks about consumers making choices about their spending, but the bottom line is no one seems to be giving up the most recent upgrade of their iPhone just yet. If the stock market can continue to rally in the face of increased savings rates, then the bullish take would be that when the virtuous cycle for the economic recovery takes hold and the employment statistics begin to improve, then there is a lot of room for spending to improve even as savings rates remain at elevated levels from their bubble lows and closer to historical norms.
For those of the bearish persuasion, the revision to the savings number is just another nail in the case for the downturn that is right around the corner. They see too many headwinds to economic growth as it is, and increases in the savings rate might be the proverbial straw that breaks the camel’s back. We continue to closely watch all of the relevant stats on consumer spending. With earnings season largely behind us, our thesis of market weakness in the fall is about to get tested.
