Regular readers will know that my take on the US economy in the new normal is pretty straight forward. It is that without high debt and asset price growth, the US consumer must rely on income growth or reduced savings to grow his/her personal outlays. With consumption roughly 70% of the economy, that means slower growth than yesteryear. On the plus side, it may also mean less likelihood of asset price driven recessions.
Friday saw the release of the Personal Income and Outlays report from the BEA and the results were consistent with this basic theory:
Personal income increased $28.2 billion, or 0.2 percent, and disposable personal income (DPI) increased $18.9 billion, or 0.2 percent, in February, according to the Bureau of Economic Analysis. Personal consumption expenditures (PCE) increased $86.0 billion, or 0.8 percent. In January, personal income increased $26.5 billion, or 0.2 percent, DPI increased $5.0 billion, or less than 0.1 percent, and PCE increased $40.9 billion, or 0.4 percent, based on revised estimates.
Real disposable income decreased 0.1 percent in February, compared with a decrease of 0.2 percent in January. Real PCE increased 0.5 percent, compared with an increase of 0.2 percent.
So, income growth remains lousy at 0.2% for February. Indeed, in real terms it fell 0.1%. For growth, however, the news was better with the personal consumption expenditures jumping 0.8% in the month. No prizes for guessing where the surge came from:
Personal saving — DPI less personal outlays — was $438.7 billion in February, compared with $509.5 billion in January.
The personal saving rate — personal saving as a percentage of disposable income — was 3.7 percent in February, compared with 4.3 percent in January.
Yes, indeed, the savings rate fell significantly to the lowest level since late 2009 (on a three month moving average). The following chart from Calculated Risk tells the tale:
Theories of a new normal suggest that this savings rate will remain higher than it did in the post millennium debt boom. You can see, however, that we’re swiftly approaching the ceiling of the former range (and don’t forget that this is a 3 month moving average, on a month-by-month basis we have already punched into the old range at 3.7% for February).
I find it hard to believe that the US consumer will give up saving again having been through the GFC but higher consumer confidence on improved employment prospects and an inflating stock market may be enough to keep this trend running. Household asset wealth increased in the last quarter of 2011 for the first time in four quarters and will have improved further in the first quarter of 2012 on a rising stock market and at least flattening real estate market.
In the event that this trend continues, you would have to say that the new normal is in fact just some version of the old and that the low household savings rate has returned to what economists like to call an “imbalance”. Something for economists to worry about but not markets, at least until the next shock comes around and the whole thing falls in a heap once more. This is not beyond the realms of possibility.
Still, I find it hard to believe. Even the US consumer has his limits and surely the GFC was a generation defining event? I also reckon that the US housing bounce is temporary so some of the positive wealth effect will wane. If the savings rate rebounds the US will slow in the second half, just as it did in 2010 and 2011.