Americans are saving more — and it’s killing the economy

 

Americans are saving more money, and it’s becoming a problem for economic growth.

In a big note out Wednesday, Peter Hooper and the economics team at Deutsche Bank look at the recent rise in the savings rate and what it means for the future of US economic growth.

In short, Americans are taking potential growth and sticking it in their pocket.

Here’s Deutsche Bank (emphasis mine):

Growth has slowed meaningfully over the last two quarters, and the deceleration in consumer spending, which fell from a 3% annualized growth rate in Q3 2015 to 1.9% in Q1 2016, has been an important driver of this slowdown. Our analysis suggests that while the saving rate may stabilize and even fall slightly, a sharp decline that would significantly boost consumer spending is unlikely. Therefore, while growth is likely to pickup in the quarters ahead, it should also remain modest.

Now at 5.4%, the savings rate is still low(ish) on a historical basis. But the recent uptick has been confounding to economists given not only the decline in oil prices but the strength of the labor market.

The thinking here being that if you’re saving money on gas, you might spend it, and that if you go from having no income to some income, you’ll spend that, too.

The savings rate steadily marching higher.

This isn’t the first time we’ve written about how the savings rate’s increase is problematic for an economy driven by consumer spending. See here and here.

Consumer spending accounts for about two-thirds of gross-domestic-product growth. This ranges from people buying stuff like clothes, cars, and televisions, to food, to services, to gym memberships. And the math on this is simple: More saving equals less spending, which nets less economic growth.

But the puzzlement from the economics community on why savings are increasing is always an interesting line of thinking to explore.

In its report, Deutsche Bank includes the following chart, which shows a clear preference for Americans to save rather than spend money since the financial crisis.

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Intuitively this makes sense.

Assets of all types declined in value during the financial crisis. Most notably among these assets were home prices, which are a major driver of consumption. And so it’s easy to see why Americans went from wanting to save and spend money in equal proportion to essentially saving $2 for every $1 spent.

A note from Mike Ryan of UBS published back in March neatly captured the standard line of economic thinking on the savings rate “puzzle.” Ryan writes (emphasis mine):

One of the curious anomalies of the current stage of this economic expansion is the more measured role being played by the consumer. Despite the seemingly supportive combination of improving labor market conditions, rising wages and salaries, and lower energy costs, consumer spending has not expanded at the pace many would have expected at this point. Instead, consumers appear content to simply continue socking away the windfalls from both wage gains and energy price declines, as evidenced by the rise in the domestic savings rate.

Now, the thinking here is sound: If someone has less money and then the next day has more money, the person might want to spend that extra money.

Additionally, with the labor market strong it seems that conditions are ripe for more Americans to expand their spending and, ideally, even use a little bit of a leverage to stretch that power further.

But thinking that American consumers would prefer to save rather than spend additional income just a few years after the worst recession since the Great Depression does not at all seem crazy to me. To make up for a loss in net worth, you’d think that “save more” is about the easiest fix one could make.

Of course, economists are not entirely blind to this dynamic of postcrisis uncertainty driving consumers to save rather than spend.

Deutsche Bank writes: “One possibility [for explaining the higher savings rate] is that there may be an ongoing shift toward a desire for more savings, irrespective of the level of wealth, interest rates, and other factors … This shift toward more savings may arise because the macroeconomic environment is viewed as inherently riskier following the financial crisis.”

But struggling to understand why Americans might be more inclined to save money after having seen their net worth plummet almost overnight is the kind of argument only an economist could really love.

2 clear signs the stock market ‘endgame’ is approaching

Myles Udland

Is this the top?

In a note to clients on Friday, UBS strategist Julian Emanuel suggests that a few signs pointing to the “endgame” for stocks are coming into view.

The basic outline is that once the Fed starts raising interest rates the wheels are set in motion for the stock market to go lower.

Emanuel notes that both the 2000 and 2007 stock market sell-offs have been preceded by a collapse in merger activity and a rotation into financial stocks and out of utility and consumer staples.

The same themes have been playing out in markets recently, and it has Emanuel nervous.

“And while age alone does not portend the definitive end of a Bull Market,” Emanuel writes, “the current rally, at 2,611 days, is now the second longest in modern history, behind only the 1990-2000 bull market.

“Yet the current milestone comes just as ‘Signs of The Top’ become clearer — a surge in M&A activity in 2015 exceeding the heady days of 1999-2000 and 2007 followed by a lull in deal-making catalyzed by extreme market volatility, ending in the largest quarterly rebound since 1933, from -11.4% to close the quarter +0.8%.”

Mergers are seen as possibly the clearest sign that investors and corporate managements are confident in the current market and economic cycle. You could perhaps see merger activity as the corporate equivalent of a consumer-confidence survey.

Additionally, markets have seen a rotation into financial stocks — which are expected to benefit from higher rates — and away from consumer staples and utilities, which are often big shareholder-return stocks that supplement fixed income in times of low rates.

Emanuel again:

The equity market volatility comes on the heels of the Fed’s first rate hike in 9 years, on 12/16/2015, with the first hike in the cycle traditionally being the demarcation point for the ‘countdown to the bull market peak’ with an intervening ‘time to the top’ of as short as 8 months to as long as 41 months post the first hike.

The leadership change of recent weeks, into Financials and away from Utilities and Staples is reminiscent of the last stages of the 1999-2000 bull market top.

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And so simply put, two things are happening in markets right now that have historically preceded the end of big bull market runs.

Now, despite the warning signs coming from the market, Emanuel still thinks we’ll see new highs in the stock market this year, with his year-end price target for the S&P 500 sitting at 2,175. On Friday morning the S&P 500 was trading at about 2,060.

And as Emanuel notes, stocks usually do go higher after the beginning of an interest-rate-increase cycle. But it is this interest-rate increase that puts the eventual demise of the market in plain sight.

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