Saving Rate is now Negative

[robert]

Per recent CNN article:

Quote:

Personal incomes increased 0.3% in July, while spending soared ahead by 1%. As a result, the personal savings rate tumbled to negative 0.6%, the lowest since monthly records began in 1959. Read the full report. Quarterly data show negative savings rates for several quarters during the Great Depression. The savings rate was negative 0.2% in October 2001 and was 0% in June. Negative savings rates are possible if consumers spend by selling assets, dipping into savings or borrowing against future income.

See rest of article at:

http://tinyurl.com/d6c2p
How long can we keep this up?

Edit to reduce size of URL

[TargaDave]

Does anyone know the "savings rate" formula that is used in these reports? Not trying to defend anything here just trying to understand how they come up with this number. I read in a WSJ ariticle that it didn't include investment gains, property gains, etc. How would they even measure it?

T-Dave

[moghopper]

Quote:

Originally Posted by TargaDave Does anyone know the "savings rate" formula that is used in these reports? Not trying to defend anything here just trying to understand how they come up with this number. I read in a WSJ ariticle that it didn't include investment gains, property gains, etc. How would they even measure it?

I have no doubt that as a nation we don't save much, but I think this number is total garbage. But hey, on the other hand, it comes from your government, and they're here to help, right?

Quote:

The Bureau of Economic Analysis starts with personal income, which includes wages (from a job or self-employment), dividends, interest, rental income (if you are a landlord), and employer contributions to health and retirement plans. From this it subtracts income tax and the employee's share of payroll taxes. The difference is disposable personal income. From this it subtracts consumer non-investment expenditures, including retail sales, utilities, interest payments on consumer debt, and money people send to friends and relatives overseas. For housing, the bureau counts rent for renters or mortgage interest, property taxes and insurance for owners. It does not subtract down payments or principal payments on a house. What's left is personal savings.

[Michael]

Quote:

I read in a WSJ article that it didn't include investment gains, property gains, etc.

That's correct. You can't build a new factory with the price rise on homes, only with the difference between what people produce and what they consume. That's why they only measure that difference.

Quote:

How long can we keep this up?

Because so many other countries are great savers, there is a world wide surplus of savings. No more is really needed at this time.

[P.S.]

Quote:

Originally Posted by Michael Because so many other countries are great savers, there is a world wide surplus of savings.* No more is really needed at this time.

This isn't so explicable to me. Could you lay out your reasoning? My retirement fund or rainy day kitty has no immediate bearing on my neighbor. Microsoft's investment in it's people and company has no immediate effect on Caterpillar. ..

[Michael]

Quote:

Microsoft's investment in it's people and company has no immediate effect on Caterpillar. ..

Cat uses computers that have Microsoft Windows installed. Microsoft hires construction companies that use Cat tractors to prepare the ground for a new Microsoft office.

Both Micro and Cat borrow money in the international market to finance their activities. If your 401k has a bond fund in it, you have loaned money to both Micro and Cat so they could expand their operations.

However, my main point was that there is so much excess savings on the world market that both Micro and Cat have no trouble borrowing money to expand their operations.

[Craig]

I've been told the savings calculations don't include qualified plans, such as 401(k)'s ... I agree the data is questionable.

But whatever the exact numbers, it is shocking how many people do not save, or do not save enough.

[Michael]

As I understand it, the data only includes employee contributions to 401k plans. It doesn't include employer contributions.

[BunsGettingFirm]

The savings rate does not include 401(k) contributions, IRA contributions, the extra payment you make toward your mortgage, or the stocks and bonds you buy outside of retirement plans. Basically, anything other than traditional savings in a bank account or in cash is not counted. Yeah, it is very misleading.

[Donner]

Check out this week's Barron's. Article entitled "The Big Hook" by Sandra Ward. It's an interview with two hedge fund managers who view the negative savings rate as very alarming. They maintain that "Consumers are broke but they don't know it yet."
They maintain that consumers are using their credit cards to make their debt paqyments. They maintain this situation is unsustainable and further, only sustainable fora couple of months! They also have a very interesting take on the level of mortgage debt in the nation. They maintain that real estate has become an investment class and should be treated like any other investment class. They maintain that it costs about 8% to maintain a piece of real estate -- mortgage, insurance, taxes etc. and that at this point if real estate is not appreciating more than 8% per year it is a losing proposition as an investment. They think that RE is about tapped out and we are facing a problem there. Real good read.

Donner

[BunsGettingFirm]

Donner, hedge fund managers are always spewing doom and gloom. Our doom and gloom make them rich and famous!

Although the number is probably bogus, I do get the impression that many or most americans are indeed broke but don't know it yet.

But what are the consequences of this? How will it affect the markets? If tomorrow they stop spending and start saving, what happens?

[Marshac]

Quote:

Originally Posted by TromboneAl Although the number is probably bogus, I do get the impression that many or most americans are indeed broke but don't know it yet. But what are the consequences of this?* How will it affect the markets?* If tomorrow they stop spending and start saving, what happens?

Consumption drops, profits fall and become losses for some. Jobs are lost.

[moghopper]

Quote:

Originally Posted by Marshac Consumption drops, profits fall and become losses for some. Jobs are lost.

Yea, but more repo (wo)men will be needed. So that's a future growth industry.

[Donner]

This negative savings story hit the Washington Times editorial page today.* *The guys in Barron's pointed out that Real Estate leverage is a two edged sword.* Works great to spur consumption when
RE is on a rocket ride and folks are pulling equity out to buy their toys.* But, they warn, its going to cut hard the other way when RE stalls, or even drops in some areas.* The Barron's guys maintain that people will figure out fast, fast that they are broke.* Then will begin the process of DE-LEVERAGING.* *This is a term that all of us are going to be hearing more and more in the future.* Greenspan alluded to it in his Jackson Hole speech.*

The Barron's guys say that the benefit to GDP from leverage derived consumption is already baked into the cake.* With mortgage related debt skyrocketing (61% of all bank credit outstanding and growing) all that is left is paying off that debt.* Just how is all that mortgage and HELOC debt going to be paid off if RE stops appreciating 20% or more annually?* Folks are going to start to DE-LEVERAGE reduce the debt outstanding either voluntarily by liquidating assets or be compelled to de-leverage over time by reducing consumption and directing more disposable income to debt liquidation -- a kind of forced savings.* Either way it is going to cut hard into the economy (enough to drive us into recession according to the Barron's boys) and by extension drive hard into the markets as well.

In a different article in the same Barron's a group of paid Wall Street flacks predict that the S&P is going to end the year comfortably higher -- (complete with smiley portraits! )* Why?* According to the most optimistic Bull in the round -table: there needs to be multiple expansion for the market to move higher from here -- the public has to be sucked in in the last quarter like it has been the last couple of years-- that will happen when investors turn to stocks when they bail out of RE! * Boy, has that guy got another thought coming.

Finally, Barron's indulged itself in a "Who Can Afford to Retire?" editorial.* *Nobody, of course.* Haven't been saving enough.* Don't think they hang around this Board.

De-leveraging.* Interesting thesis.

Donner

[Marshac]

I really don't believe that leverage is the correct word to describe most consumers' situation. The word I would use is just plain debt. Companies and investors use leverage (OPM) to secure assets in order to increase their own rate of return.

Most consumers take on debt in order to buy the new 47" plasma display at Best Buy, or that new Hummer H3.... neither of which are investments, and both of which are depreciating assets. If you asked most home owners these days about their house, and why they bought it, the phrase 'it's a great investment' will inevitably come up. Do they know why it's a great investment? Have they played with the rent/buy numbers? No, they just repeat what they have heard in order to justify to themselves the exorbitant amount of debt (not leverage) they have taken on. This type of debt is a drain on the future economy as it is simply consumption today at the expense of tomorrow.

[BunsGettingFirm]

My townhouse's mortage is the same as the rent on a one-bedroom apartment, and that's a 15-year (now more like 8- or 9-year) mortgage. OK, I have to pay real estate taxes, but then again, I don't have to hear my downstairs apartment neighbors "celebrate" Valentine's Day at 3:50 AM!

Cash out your house to buy a Hummer H3? Why would any sane person do that? I'd rather go to graduate school full time to get my second master's degree. Hmm...that last comment just made me realize that perhaps I'm the insane one.

Buns

[Nords]

Quote:

Originally Posted by Michael However, my main point was that there is so much excess savings on the world market that both Micro and Cat have no trouble borrowing money to expand their operations.

No matter how fast they're saving, I bet the U.S. Treasury can print the dollar bills even faster...

We can't even decide what the actual CPI is or how many jobs have been created from one month to the next. What makes us think the govt has a clue what people are saving? I think it's great that the savings rate is negative, because if the govt thought it was positive then it'd be subject to taxation.

[sgeeeee]

Quote:

Originally Posted by Nords . . .I think it's great that the savings rate is negative, because if the govt thought it was positive then it'd be subject to taxation.

But can't you just imagine some politician thinking, "There are a small number of savers who have saved a lot. There is a large number of non-savers who want a lot. . . If we tax the savers and give to the non-savers we gain the maximum number of votes."

[Michael]

Quote:

If we tax the savers and give to the non-savers we gain the maximum number of votes."

Actually they do, its called inflation.

Quote:

No matter how fast they're saving, I bet the U.S. Treasury can print the dollar bills even faster...

That's true. The fed prints money, loans it to banks, who then loan it to individuals and companies. This causes inflation, which is a hidden tax on savings accounts. This supplements savings by foreigners. The resultant low interest rates guarantee that savers will lose ground to inflation, to the benefit of borrowers (who are the majority).

So far equity has kept ahead of inflation, but dividend rates are getting quite low as ever more savers switch to stocks to avoid certificates of confiscation at banks. Some wonder how low the dividend rate can go, and still have equities provide a decent return. Take your best guess.