- Jan 14, 2016
- The saving rate dropped to its lowest level since 2007 in September.
- The surge in auto sales likely pushed saving lower than it might have been, but the downward trend in saving will continue.
- Wealth effects, high confidence, modest income growth, and demographic trends will drive saving lower.
- Although saving has further to fall, its low level will be a restraint on spending growth.
The 0.5-percentage point drop in the saving rate in September was at least partially artificial. Consumers cut back on their saving as they reacted to and recovered from natural disasters. However, part of that came from a surge in vehicle sales. New-vehicle sales jumped 2.4 million units from August to September to their highest level since 2005. The jump was driven by purchases that could not be made in August because of Hurricane Harvey and purchases made to replace vehicles destroyed by the storm.
The Bureau of Economic Analysis records the full purchase price of the vehicle in the month the purchase is made, despite the fact that most buyers finance or lease their purchases, spreading the cost over years. Hence, recorded spending is higher than cash outlays and consumers can make other purchases and seem to draw down their savings. In the 25 months since 1993 where vehicle sales have risen by more than 1 million units, the saving rate has fallen 23 times and the average decline has been 0.6 percentage point. In the 25 months unit sales have fallen by more than 1 million units, saving has risen 19 times by an average of 0.2 percentage point. Therefore, over the next several months, as vehicle sales return to their prior level, the saving rate will likely recover at least some of its September decline.
However, the longer-running trend in saving is likely to remain downward for the next couple of years. One important driver of lower saving is growing household wealth . As household wealth increases, consumers add to their spending. Since the recession, consumers have been quick to respond to additions in their financial wealth. This wealth effect spending has been an important driver of spending growth and the reduction in saving. With stock market valuations high, it is unclear how powerful this effect will be.
However, wealth effects from growing home equity have been small by historic standards since the recession, but they are growing. Housing wealth effects were restrained by negative equity and tight lending standards, both of which made it difficult for homeowners to turn increases in housing wealth into cash. But both are reversing. Total homeowners’ equity exceeded its prerecession peak early this year as fewer and fewer homeowners have negative equity. Lending standards are gradually easing as the foreclosure backlog disappears in more states. With house prices rising steadily and faster than income, housing wealth effects will be a growing driver of spending and lower saving.
Consumers’ willingness to spend out of their growing wealth and see their saving drift lower is supported by their positive attitudes. Consumer confidence by many measures is at or near cyclical highs and has risen materially over the last year. Though the initial jump following the election of President Trump was viewed as likely to be temporary, that no longer seems to be the case.
Consumers have also reduced their saving since it was the only way to maintain the growth in their spending in the face of slowing income growth. Real spending growth has been stable from 2.5% to 3% annually for nearly two years. Nominal disposable income growth peaked in early 2015 at close to 6%. Since then, it has dropped by about half. Real income growth has declined even more sharply in the face of the shift from falling energy prices to rising energy prices. It is currently growing nearly 1.5 percentage points more slowly than real spending is growing.
The weakness in income growth comes despite the tightening in labor markets and gradual acceleration in growth in wage rates. The latter has been offset by a moderation in growth in employment and hours worked resulting in relatively steady growth in wage and salary income. At the same time, asset income growth has held about steady. The main sources of the slowing in income growth have been a small moderation in growth in government transfer payments and an increase in growth in tax payments .
A final, albeit small, source of drag on saving comes from demographics. The share of the adult population over age 65 and therefore more likely to be retired and dissaving began rising rapidly in 2011 and growth will not slow until the middle of the next decade. Demographic effects on saving are small, particularly over short periods, but this does provide a weight on saving for another decade.
Despite the fact that the saving rate will fall further, it is low. Given the lessons learned in the Great Recession, the lack of saving will limit spending growth going forward.