We got the data on consumption, savings and income from the U.S. Department of Commerce’s Bureau of Economic Analysis (BEA). What we saw should definitely bolster the view that recovery has taken hold but at the expense of saving.
Disposable personal income (DPI) — personal income less personal current taxes — increased $1.6 billion, or less than 0.1 percent, in February, in contrast to a decrease of $26.0 billion, or 0.2 percent, in January
Personal outlays and personal saving
Personal outlays — PCE, personal interest payments, and personal current transfer payments — increased $36.4 billion in February, compared with an increase of $40.4 billion in January. PCE increased $34.7 billion, compared with an increase of $38.5 billion. Personal saving — DPI less personal outlays — was $340.0 billion in February, compared with $374.9 billion in January. Personal saving as a percentage of disposable personal income was 3.1 percent in February, compared with 3.4 percent in January. For a comparison of personal saving in BEA’s national income and product accounts with personal saving in the Federal Reserve Board’s flow of funds accounts and data on changes in net worth, go to https://www.bea.gov/national/nipaweb/Nipa-Frb.asp. (Emphasis added)
So, disposable personal income is increasing at an anaemic pace. Yet, consumption growth is moving along at a pretty good clip. The divergence has translated into a decline in the savings rate.
None of this should be a shocker. With zero Fed Funds rates, savings and money market accounts earn nearly no interest. Meanwhile asset prices are through the roof. Even house prices have bounced off the lows of 2009. Why would you save? U.S. economic policy is not designed to promote household savings. Indeed, because of the financial sector balances, fiscal expansion through deficit spending has to be met with savings in the private sector. In practice, this has meant immense business sector savings but little in terms of adjustment in the household sector.
We saw a similar pattern last month. In reviewing the recent data and the historical data leading up to the recession, I said:
the data confirm that a technical recovery is underway. But, they also point to asset prices as a contributor to the decline in spending growth starting in 2005. If house prices are still too high as I believe they are, eventually they will come under pressure. We should see this reflected in consumption – even before we see it in income. Look to PCE as a double-dip canary in the coalmine then.
The US still lives in an asset-based economy in which changes in asset price (house prices, bonds, stocks) drive changes in the real economy. This is true because the U.S. private sector’s levels of indebtedness mean that, at the margin, when asset prices decline, many individuals run into funding problems. The fact is high private sector debt levels always lead to debt deflationary outcomes unless the debt can be inflated away via inflation or income can be increased through income and profit gains.
The challenge the US faces is how to maintain consumption growth in the face of continuing pressure on income. Businesses are enjoying a huge resurgence in profit and this has contributed to their savings and low debt levels. Yet, households remain indebted. Moreover, after the 2009 stimulus shot in the arm, disposable personal income is not going anywhere.
Unless US policymakers solve this problem – the divergence in the benefits of economic policy for business and households, consumption growth will have to slow. If consumption does slow and asset prices stall, the US will be headed back into recession.