Friday, August 5, 2011

Personal Saving Rate

After the 5 percentage drop of major stock indices on Thursday, there is once-again talk of a double-dip recession. Occasionally, I am told that the market is efficient and rational. But, every few years, the market proves that it is anything but, swinging from irrational exuberance to a crazed flight to safety. Currently, Apple's after-tax-ttm-earnings-to-enterprise-value ratio is 7.4%. Apple is a healthy, growing company by any measure. Yet, investors seem to prefer the "safety" of a 30-year bond with a yield of 3.84%. That bond will decrease in value as interest rates rise whereas Apple will continue to grow and either force its stock price to rise either because the stock market regains its sanity or through stock buybacks.

When news article talk about the idea of a double-dip recession they seem to focus on (1) GDP, and (2) jobs. GDP is reasonable, since a standard definition of recession is two consecutive quarters of negative GDP. But, the focus on jobs is silly. Jobs don't return until companies have used up the slack and are confident that they'll have work for the new employees. In other words, they're a lagging indicator. And, jobs are returning---as of July 2011, the U.S. has gained 1.3 million jobs compared to a year ago. But, it's more important to look at consumption, manufacturing and income since these most accurately reflect economic activity:

  • Durable Goods Orders are up 7.9% versus a year ago (June 2011)
  • Personal Income is up 5.0% versus a year ago (June 2011)
  • Industrial Production is up 3.4% versus a year ago (June 2011)
  • Retail Sales are up 8.1% versus a year ago (June 2011)
Frankly, I don't see a recession. These numbers have all been strong for about a year and a half and don't show signs of falling. If anything, we should be concerned about inflation as Producer Prices are up 7.0% versus a year ago (June 2011) and the Consumer Price Index is up 3.6% versus a year ago (June 2011).

One important aspect of our economy that I haven't seen discussed is savings. Hence the title of this article. Take a look at this chart showing the Personal Saving Rate in the U.S.. Notice how it fell from around 1982 to 2008. No wonder growth was so easy during that period! If people are constantly depleting their savings, economic activity increases! But, it recently bottomed out around 1-2%, and, well, you can't really go much lower. Now, the economy has reverted to a more reasonable rate of savings, around 5%. The growth we saw in recent history simply isn't going to return. It was unsustainable because it required a negative change in the personal saving rate. Many complain that the U.S. economy (GDP) only grew at a rate of 1.3% in the second quarter of 2011. But, it's unlikely that we'll see the "good 'ol days" of 3% growth that we saw 1982-2008. 2% might be the norm for the foreseeable future now that our ability to pillage the savings accounts has been lost.

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