Carr’s wrong turn

All right you lot, no more reference to myself in the third person.

Today Adam Carr takes on the RBA (h/t The Lorax) in arguing that:

So how is it that the household savings ratio has risen so sharply then?

Surely consumption must have fallen to facilitate this? Okay, that sounds reasonable and I’m hearing you. But, and let’s be honest, that would be, and is, a lazy assumption. Check the next chart.

It shows the breakdown of household savings and what has been driving it. Clearly, it ain’t a drop off in consumption (bottom red line). Indeed consumption has shown fairly steady growth and even seemed to undergo a temporary spike at the same time savings surged. Just look at the chart.

What did change was a spike in income in 2008 (top blue line). Indeed in the December quarter 2008, gross household income surged $13.9 billion, which is the largest increase on record. That one quarter, that $13.9 billion, pretty much accounts for most of the increase in household savings by the way (which went from $8-$21 billion). Now, much of that $14 billion was a lift in social assistance as a result of the governments’ Economic Security Package (remember in December we saw about $8.6 billion in payments to pensioner and low-middle income earners in response to the GFC). Indeed, the lift in the household savings ratio to 9.7 per cent today largely reflects that one-off transfer from government savings to household savings – and that’s it. There has been very little in the way of an autonomous lift in household savings outside of government transfers. This is a very dangerous myth. In the absence of those government transfers, the household savings ratio would likely be around 3 per cent (well below the historical average).

At the end of the day it is only a fairly sloppy and lazy glance at the data that has led some, including the RBA, to conclude that consumers are being cautious. The above charts show just why I am completely contemptuous of the idea. It lacks any merit, yet it has huge policy implications. This is why I continue to expect the RBA to eventually wake up to reality and drop this concept from their commentary. Failure to do so could result in a fairly serious policy error.

Just a few quick points. First, here is Carr’s same chart with a trend line through it in green.

I could go to some lengths to debunk this argument but there is no need given Carr’s own chart makes the point far more eloquently. Clearly, late 2007 marked a shift in trend, not disastrous but very clear nonetheless. At a guesstimate, the new trend line is some 8-9% below the old. That may not seem like much, but in a $200 billion sector, that’s around $18 billion clams headed somewhere else. Like paying down debt. It is equally clear in the chart that the same inflection point marks the beginning of an ongoing divergence between income growth and spending.

There is a line that the RBA continues to use which is out of step with this new normal of lower consumption that they have been integral in creating, but it is not the reference to cautious consumers. It is the ongoing reference to “overall credit growth remain[ing] quite subdued”. This implies that credit growth could grow more quickly without triggering more rate rises, which contradicts myriad other declarations by the RBA that it is happy to see that “the run-up in household leverage has abated”. Adding the word “historically” before “subdued” would diminish the contradiction and give the RBA flexibility in the future.

Be careful what you wish for, Adam.