Fly by night, away from here
Change my life again
Fly by night, goodbye my dear
My ship isn't coming
and I just can't pretend
- Rush
Contrary to popular opinion, the savings rate has not been negative in recent decades. Though many would have you believe Americans are soullessly irresponsible consumers (and I admit there is much evidence to this point at my house around this time of year), the rate of savings as a percentage of disposable personal income actually bottomed out around 1.0 percent a couple years before the current financial challenges began.
In fact, as you can see from the chart below, the rate was actually trending slightly upward between 2005 and the end of 2007 before the crisis began to kick into high gear.
Since then, of course, the savings rate has rebounded — first due to fear from the downfall of the economy, but now continuing as a result of uncertainty about the future. Last month, the rate bumped up to 5.7 percent from 5.6 percent.
Households have certainly been repairing their balance sheets, but to what end, I wonder?
A closer look at the chart prior to the crisis reveals a second order movement that has tremendous psychological effects on consumer behavior. Specifically, for years now, we have not only been saving less, but saving less at a more rapid rate. In other words, our spending habits have been careening toward an inevitable reckoning for some time. More than an entire generation grew up with the assumption this was how it would always be.
I often wonder whether the current crisis is strong enough to change this course. One could point to the savings rate and argue that we've already adjusted to the "new normal" of tightening budgets and reining in our spending habits. But forgive others around the world if they have a difference of opinion.
First, the recently announced $600 billion debt monetization by the Fed is but one example of a government stepping to spend in where private consumers have pulled back. When governments spend in order to offset non-spending by consumers, the result looks the same to the outside. After all, what difference does it make if you pay for your healthcare or your government does?
Saving is saving and spending is spending and today we continue to spend as evidenced by a growing GDP figure driven by government activity.
The second reason I believe this spike in spending is not an adjustment to the new normal is mounting anecdotal evidence. Think about the iPad's release earlier this year. Here's a product consumers knew little about, except that it was an Apple launch — meaning it was probably going to be the "coolest" thing out there.
The day after it launched, I had a cross-country flight and counted no less than five people on my plane with the devices. Certainly, a flight from San Francisco to Boston is not an appropriate sample for the entire country, but realize no one had an iPad two days beforehand.
Instead of a permanent, cultural shift in our spending habits, I believe we are seeing the buildup of a war chest that consumers will tap sometime in the future.
Let's go back to the government spending for a moment. On one hand, some of this spending is necessary to smooth out the riverbed until we can figure out how to get the economy back on track. On the other, if we do not "figure out how to get the economy back on track" and focus only on short-term figures, we are simply pretending, waiting for our ship to come in.
We need focus on the causes of our economic malaise: mortgage market disruption, Washington uncertainty, and potential foreign investor unrest.
Key Developments
The U.S. economy grew at a 2.5 percent annual rate in the third quarter, more than the 2 percent previously calculated. Gross domestic product grew at 1.7 percent in the second quarter. The growth was attributed to stronger consumer purchases along with gains in corporate investment in new equipment.
The number of people applying for unemployment benefits fell sharply last week to the lowest level since July 2008. The Labor Department said today that weekly unemployment claims dropped by 34K to a seasonally adjusted 407K in the week ending Nov. 20.
University of Michigan confidence index rose to 71.6 for November, from 67.7 the previous month. The increase was driven by more optimism in the economy and strong equity prices.
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