After gorging themselves silly on cheap credit, about a year and a half ago US consumers began a much needed detox. Yet by December the US savings rate as a percentage of disposable income stood at 4.8 per cent, more or less unchanged from a year before. The savings rate rose from lows of about 1 per cent at the start of 2008, grinding upwards for about a year with various monthly bumps thanks to government rebates and subsidy schemes. But in 2009, it looks like the savings rate in essence went no where. Have US consumers forgotten their frugal ways so soon?
On a quarterly basis, the savings rate had been rising before levelling off towards the end of last year. The rebound in equity prices, as well as some tentative signs of improvement in the housing market, helped to drag household net worth – which tends to have an inverse relationship with the savings rate – up from its trough early in 2009. If savings have since stabilised, that suggests future income growth will be spent rather than saved.
Yet such a conclusion would be premature. Yesterday's personal income data showed a greater-than- expected 0.4 per cent rise in December – but this was propped up by government pay-outs. Wages and salaries rose by only 0.1 per cent, reflecting continued labour market malaise. Moreover, the savings rate has yet to adjust fully to the vast destruction in household wealth, argues Lombard Street Research. Since 2006, net worth as a multiple of income fell by almost a third, from peak to trough. Judging by that historical relationship, savings should continue to rise gradually to 7 per cent or more. Households will be helped as banks just write off part of their boomtime lending. But with fourth-quarter strength in economic growth unlikely to be sustained, and equity markets perhaps wilting, US consumers' purge is not over yet.