The Personal Savings rate plunged in September to 3.6% from 4.1% in August. That was the net result of Personal Spending, a.k.a. Personal Consumption Expenditures (PCE) rising by 0.6%, which was in line with expectations. Personal Income rose just 0.1%, which was well below the consensus expectations of a 0.3% rise. In the short term, a falling savings rate is great for boosting economic growth.
Yesterday’s first look at GDP growth in the third quarter showed that the Consumer was responsible for 68.8% of the growth, which is roughly in line with the Consumers’ overall share of the economy, which is 71.1%.
This was the third month in a row where spending rose significantly faster than income. In the long-term though, a falling savings rate is very bad news. It represents the seed corn for future growth. Holding a feast using the corn you need to plant next year might be fun and make you feel good now, but it really isn’t a very wise thing to do.
As the graph below (from http://www.calculatedriskblog.com/) shows, the country has been feasting on its seed corn for a very long time now — not just a few months, but for decades. Note that the savings rate tends to jump sharply in recessions. Indeed, the very fact that everyone decides all of a sudden to save rather than spend is at the very core of what makes a recession a recession.
We had a very sharp rise in the savings rate during the Great Recession, and the rise started from insanely low levels. A big part of the overall growth in the economy from the early 1980’s to the start of the Great Recession can be traced to the secular decline in the savings rate.
The increases in spending right now are welcome, and are a big part of the reason we saw an acceleration in growth in the third quarter. Over the long term, the savings rate will have to rise again.
The collapse of the housing bubble destroyed almost $7 Trillion in wealth — and that was very widely distributed wealth, unlike stock market wealth that is highly concentrated. Millions of people had planned on using the equity in their homes to finance their retirement or to finance their kids college educations. Assuming that they still wish to retire some day, or to send the kids to college, they are going to have to repair their balance sheets the old fashioned way, by spending less than they earn.
Things might be looking OK for the retailers, and for the consumer discretionary stocks in general right now, but they do face a long-term secular headwind. There are many retailers, for example, that are looking very strong on the Zacks Rank. However, I would be more inclined to see companies like Macy’s (M), Bed Bath & Beyond (BBBY) and Dick’s Sporting Goods (DKS) — all of which sport the coveted Zacks #1 Rank — as attractive short-term trades, not as great long-term investments to tuck away for the next decade.
BED BATH&BEYOND (BBBY): Free Stock Analysis Report
DICKS SPRTG GDS (DKS): Free Stock Analysis Report
MACYS INC (M): Free Stock Analysis Report
Get all Zacks Research Reports and be alerted to fast-breaking buy and sell opportunities every trading day.
Be the first to comment