Friday, March 30, 2012

US consumers dipping into savings

Recent data indicates that US consumer spending has picked up steam. But it is also well known that incomes continue to lag. Where is the cash coming from to fund these new purchases?

Source: RTT News

Is it possible the consumer re-leveraging again? The latest data from the Fed shows that is not at all the case. Except for the federally funded student loan issue, consumer credit has stagnated.

US consumer credit - excluding federally funded student loans (Source: The Fed)

The answer sadly is that the consumers are tapping their savings. The data shows US personal savings rate declining sharply during the past month. This has happened before in 2009. After having delayed major purchases for over a year due to the 08 crisis, the consumer did some shopping in late 09. But now the decline in savings rate has resumed.

Savings rate as % of personal disposable income (Bloomberg)

Some of that spending is on necessities such as gasoline as well as an upgrade in durable goods/autos. But spending that is not supported by increases in income is not sustainable, particularly as credit remains tight.
BW: Dales cautioned, though, that at some point, consumers won't be able to draw further on their savings. Further job gains are needed to boost consumers' income.

Some of the higher spending last month reflected surging gas prices. But consumers spent more on other goods and services, too. After excluding inflation, which was due mainly to gas prices, spending rose a solid 0.5 percent.
Another issue with personal savings rate in the US is the lack of incentives to save these days. The stock market and the real estate markets are scary for many people. Fixed income markets now have material interest rate risk. Money market funds are worthless. Most people just keep money at their bank in savings or bank money markets accounts. According to however, the average national money market and savings rate at your bank is 13 basis points - yes, per year.

With inflation rate pushing 2%, the consumer knows that leaving cash at the bank means losing money. The Fed has achieved its goal of disincentivizing the holdings of cash. But it would be far more encouraging to see consumer spending based on better paying jobs than on replacing severely aged vehicles by dipping into savings or attempting to avoid the impact of negative real rates.
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