« State of the market, Monday, August 22, 2005, 7:00 AM | Main | More about the RSI technical indicator, Mon., August 22, 2005, 11:16 AM »
August 22, 2005
Zero personal savings, Mon., August 22, 2005, 10:05 AM
Watching U.S. consumer behavior for a while now, I have held the belief that the U.S. economy is not healthier than Canada, Japan, the U.K. or Western Europe. It may be growing faster this past two years, but there is an explanation. The Merrill Lynch economics department pointed it out in their Aug-19 report, along with certain concerns I share.
The personal savings rate has gone from 2.3% in 2004Q4 to 0.7% in Q1 to 0.2% in Q2 and now it stands at 0.0% as of June. The average for last year was 1.7%, which is the lowest level in the post-WWII era (breaking below the 2001 low of 1.8%). If we had held the savings rate at last year's average, real GDP growth in Q1 would have been 3.0% at an annual rate, not 3.8%; and GDP growth in Q2 would have been 2.3%, not 3.4%. Consumer spending would have been 2.3% (as opposed to 3.5%) in Q1; and in Q2, it would have been 1.7% (not 3.3%).
In other words, the drop in the savings rate alone this year has added about 1% to this GDP growth—reflecting the continued 'wealth effect' from housing—and 1.5% to real consumption growth. So, yes, the economy is humming along, but it's not as if the bus is being driven by improving income fundamentals (that goes for the household and corporate sector). Leverage, the direct and indirect impact of the housing "froth" (to quote Alan Greenspan) and incentive-led auto sales have been the principal underpinnings.
If we go back into the history books—like the 1% savings rate during the equity-wealth-effect boom in 1999—we can say with certainty that never before has the savings rate at or near-zero percent been followed by accelerating consumer spending; it has always been followed by a DECELERATING consumer. Well, we saw hard evidence of what's to come in July's retail sales report—auto sales up 6.7% month-over-month, of course filling them up with higher prices at the pump meant that gasoline sales spiked 2.4%, and outside of autos and gas, sales were flat as a pancake as they have been now for two of the past three months.
So the moral of the story is that after driving the brand new car off the dealer lot and filling it up (at $3+/gallon now in California) on the way to the mall, the consumer quickly realized that there was no change left to go on a fashion buzz.
Moreover, we can also see vividly from the retail sales data that signs of fatigue are setting into the housing market because real-estate oriented retail sales, such as building materials fell 0.4% month-over-month, which was the first decline in five months and furniture sales plunged 1.3% and are down in two of the past three months."
With the ML notes above pointing to the source of the concern, which is that U.S. consumers have been getting their funds from the creative mortgage cash-out process, which is illustrated in the following chart, I thought I would next look at the state of the housing market.
As you may be aware, Tuesday will bring the Existing Home Sales Report, and Wednesday will bring the New Home Sales Report.
If there is a slow-down there, then I foresee problems ahead for the U.S. economy and the equity market. And maybe that's why the bond market perked up last week.
Posted by Posted by Bill Cara on August 22, 2005 10:04:33 AM | Category: Economics