U.S. Savings Rate Rises: Temporary or Trend Reversal? ~ market folly

Tuesday, June 30, 2009

U.S. Savings Rate Rises: Temporary or Trend Reversal?

We wanted to post up this chart courtesy of Paul Kedrosky which illustrates a 'black swan of U.S. savings.' As you can see at the bottom, the savings rate in America has been paltry. At best, it has steadily declined over the last 20 years. However, the massive recession we've seen has made people hunker down and we're seeing a return to shoring up personal balance sheets. Americans have tightened their spending so much that we've now seen the "largest three-year increase in savings in modern U.S. history" with the rate recently hitting 6.9%. This is obviously a good sign and hopefully can point to Americans changing their ways in the future. In a timely piece (we're biased of course), we just last week examined the highest yielding savings accounts out there at the moment. After all, numerous readers had been asking what to do with their large, idle cash positions. We considered all the emails and comments to be our own little subset of the current American mindset; a random sampling if you will.

While there are signs of improvement in consumer/saver behavior, there is still a distinction between a temporary adjustment and a permanent shift. You'll recall that Americans are programmed to spend, spend, spend. We are a consumer nation and we consume; it's what we do. So, we'll have to see an overall change in psyche for this positive recent trend to continue. Otherwise, it will become just another upward blip in the context of an overall downward trend. Because, remember, we have a serious problem when it comes to consumer balance sheets. Millions of consumers have massive amounts of debt and we've touched on the topic of downgrading the American consumer's credit rating in the past. It will be a long and arduous process to repair the damage. But, raising cash levels certainly helps. The problem is getting consumers to keep their savings rate high now that it is improving.

We postulated back in December of 2008 that the consumer savings rate would have to rise. It has. But, now what? We would now venture a guess that the vast majority of people are raising cash levels merely to stave off any uncertainty in the mean time. Then, once the 'good times' return again, they'll revert to their programmed ways. This is a reactionary move, rather than a proactive one. It is temporary. To truly get out of this mess and to solve one of the many enigmas of the crisis, consumers need to shore up balance sheets for good, not just 'for now.' How many Americans will truly change their ways? Unfortunately, that question will only be answered with time.

(click to enlarge)

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