The Long and Short of US Savings

June's personal income and spending data told us the US personal savings ratio jumped 46bps to 4.4% - a sharp acceleration of the modest rise that's been underway since November 2011. 

• This echoes what I've previously written about the ongoing rise in the private sector savings surplus. 
• But reactions to it need to accept what's happening both on a short-term scale, but also, more importantly, on the long-term timescale.
• If personal savings ratios are set  to inch up for the next 10-15 years, this will compromise growth but underpin bond markets. 

The 0.5% mom rise in US personal income during June wasn't quite a surprise, and the fact that personal spending didn't rise at all wasn't quite a shock either. But taken together, they tell us that the US personal savings ratio (savings as % disposable income) jumped by 46bps mom to 4.4% - it's highest reading since August last year, and a step up which steeply breaks out of the modest upswing seen in this ratio since November 2011.

This is one of those indicators which it pays to look at over different timescales. On the short time scale, the rise since April is very sharp, and demonstrates some of the mechanics behind the current the 'soft patch'. On the short term, this is a surprise - just as the 'soft patch' is a surprise.   

But when you look at it over a long time-period, it barely seems shocking at all – rather, it would make more sense to ask why the ratio fell so suddenly below 4% during November 2011 to April 2012. On a long-term timescale, oscillations of savings behaviour look much clearer:

1. 1960 to 1975 – Steadily Building: personal savings gradually rose,
2. 1975-1985 – Statis Without Stability: serious oscillations in savings ratios accompanied and abetted the business cycles. From this distance, however, we can see the basic statis.
3. 1985 to 2005 – The Long Decline: personal savings ratios were eroded from a peak of 12.2% to a nadir of just 1% in April 2005.
4. From 2005 to ?? - Recovery: after a period of panic-saving (2008-2009) savings patterns have retrenched, but to levels above the previous lows.

How long will this period of gradually rising savings ratios last? The three previous cycles lasted 15 years, 10 years, and 20 years respectively.

The Short Term Impact of Rising Savings Ratio.  

Savings rise more slowly than savings ratios, and similarly, the impact of a higher savings ratio on actual spending is not always as obvious as it might seem. For example, although savings ratios are now rising again, the absolute amount of personal savings being made was 7.7% lower in June 2012 than in June 2011. The amount of personal savings made during the first half of 2012 was an annualized US$447bn, but this was 22% lower than during the same period last year, even though personal disposable income rose by 2.7% during that time. By contrast, personal outlays were up 3.7% yoy in June, and up 3.9% yoy during the first half.

Running the maths, if the underlying sequential growth in disposable income is maintained at the levels of 1H, and the savings ratio is maintained at 4.4%, this is what happens in 2H:

1. disposable income rises 4.2% yoy (up from 2.7% in 1H)
2. personal spending rises 3.8% yoy (down very slightly from 3.9% in 1H)
3. personal saving rises 13% yoy (reversing the 21.2% fall seen in 1H).

Remember, these are nominal data – the nominal slowing of personal spending is about the same as the expected slowing of the Core PCE Deflator. In real terms, the rise in savings co-exists with the current growth in spending.