The personal saving rate in the U.S. is quite high right now, which means the outlook for the average American consumer is solid this year despite the mixed economic data and weak Consumer Confidence Index reading. This is especially important because the health of the average consumer is one of the keys to economic recovery—especially at a time when the economy is so fragile and policymakers are treading carefully.
Consumer data in 2016
So far this year, the economy has been sending up mixed signals regarding its health, throwing Wall Street into a panic and causing uncertainty at the U.S. Federal Reserve and Federal Open Markets Committee. Daan Struyven, Jan Hatzius and the rest of Goldman Sachs’ Economics Research team noted this week in one of their U.S. Daily notes that the consumer “did well” last year, noting that the Real Personal Consumption Expenditures rate climbed 3.1%.
However, there are signs that this metric will grow more slowly this year as there are signs that employment growth is slowing down, and the income boost caused by energy prices will be lower this year because prices are beginning to edge higher. Also the recent stock market correction sent consumers running for cover, as it was one of the biggest factors in the weak Consumer Confidence Index reading because it caused consumers to become less confident even though in reality, they’re not doing so badly.
Mohnish Pabrai: 6.5x Return On Deep Value Turkish Stock [2020 Letter]
In his year-end letter to investors, Mohnish Pabrai, the Managing Partner of Pabrai Investment Funds, explained that 2020 had more impact on his way of thinking about the market than any other year since 1999. Q4 2020 hedge fund letters, conferences and more Following last year's lessons, Pabrai explained he has decided to move away Read More
Consumers protected by the personal saving rate
Hatzius and team argue though that because the personal saving rate in the U.S. is high due to strong savings last year as consumers stored up cash, the economy will continue to recover because consumers are now in a solid cash position. They note that not only does the personal saving rate look high to recent history but also to the equilibrium level predicted by fundamentals.
The personal saving rate reflects the difference between “disposable personal income and personal outlays,” and as of the end of 2015, it was estimated at 5.5%. The Goldman team notes that this is a high percentage relating to the net worth to income ratio.
Further, they say that the personal saving rate has climbed over the last couple of years and estimate that it’s now about 1.5 percentage points higher than the equilibrium level, based on current equity and home prices and forecasts on slack and income.
Personal saving rate subject to revisions
However, they add that it’s important to treat the personal saving rate with care when looking at in in real time because it is frequently revised—even several quarters after release. They do look at the current NIPA (national income and product accounts) saving rate as being good right now though. For one thing, they explained that when looking at Flow of Funds data, it’s also high. Further, the gap between the NIPA concept/ Flow of Funds data saving rate and the NIPA concept/ NIPA data saving rate is also bigger than typical by about 2.5 percentage points.
Additionally, they think the first release on the NIPA data might actually understate the actual rate because of the higher NIPA concept/ FOF rate. They add that revisions to the NIPA rate become “minor” about nine quarters after the initial release, so they look at estimates about nine quarters out. Looking at the initial release and the current estimate, they are able to predict what the revised rate will be as it was first reported at 4.7% and is now estimated at 5.1%.
So what this boils down to is that the strong personal saving rate suggests that consumer spending will remain solid this year despite the mixed economic data. The Goldman team does expect the growth pace to slow this year as the gap between the personal saving rate and real income growth decelerates.
“However, this is still well above the longer-term trend and should help the economy move gradually closer to full employment,” they sum up.