US Fretting: Reasons to be Fearful

What's driving the US private sector savings surplus higher? Using Google Insight to track what the US has been worrying about, we can describe the tide of worries so far in 2012.

• Iran's nuclear ambitions (peaked end-Feb)
• The possibility of a Chinese hard landing (peaked end-April)
• Eurogeddon (plateaued in June, retreating now)
• Next up . . . Fiscal Cliff

I have previously (here ) stressed that part of the reason for the US's 'soft patch' has been an unexpected re-emergence of financial caution:

'After falling pretty much uninterruptedly since 2009, the US Private Sector Savings Surplus (PSSS) rose 0.5 percentage points yoy in 1Q, and based on the data currently available looks to have risen by a further 2.4 percentage points yoy in 2Q. If this is correct (and it's unlikely to be dramatically wrong), then the US PSSS is at its highest level since 1Q11 on a 12m basis.A rising PSSS simply means that households and corporations are consuming (and investing) a smaller proportion of their income (and profits). And this in turn saps domestic demand, and acts against those fundamental forces which should be sustaining the domestic cycle.”

But the crucial question is: what is driving this renewed US financial caution? We have already ruled out monetary policy, because bond yields remain far below anything 'fair value' models would suggest – when that happens, private sector saving surpluses normally dwindle, not burgeon. One way of shedding light on this question is to track what the US population has been searching for on Google, using Google Insight. Four things which have been repeatedly said to be panic-worthy are the Euro Crisis, China's slowing, Iran's nuclear ambitions, and the approaching fiscal cliff. But which, if any, are responsible for the bouts of caution?

The answer, as the chart shows, is 'each of them', but at different times. 

 In fact, there is a clear sequence at work.

1. During January and February, the Google data suggests the US's main worry was about Iran's nuclear ambitions. Concern about China was rising, but this was probably offset by a retreat in concern about the Euro.
2. Throughout March, concerns about Iran largely evaporated, worries about China stabilized, and concerns about the Euro crisis continued to melt away.
3. Beginning in April, concerns about China mushroomed, and 'China crisis' became the dominant search-term out of these four, peaking at the end of the month. At the same time, concern about the Euro was staging a muted comeback.
4. By May, concern over China's slowdown was still sharp, but it was first rivalled, and then surpassed, by worries about the Euro. In retrospect, it is not difficult to link these concerns both with the rise in the private sector savings surplus, or even the 6.3% mom fall it the S&P500. In short, May was given over to fretting about external economic threats.

5. In June, although worry about China and Iran had fallen away, the Eurozone's crisis dominated US search enquiries virtually all month. Not until late June did its salience start to retreat.
   6. Throughout the first six months, the threats most likely to have triggered a rise in financial caution were exogenous. But quietly a domestic financial issue was working its way up the worry-agenda: the set of worries about politics and policy captured by the phrase 'fiscal cliff'. As the chart shows, the interest shown in this by Google searchers began to rise in late June, and by mid-July seems to have become - on this measure at least – the most fretted about topic of these four.

Meanwhile, concerns about the Eurozone, about China and about Iran's nuclear ambitions, have retreated in importance: latest data suggests that concern about China and Iran are around their lowest levels so far this year, whilst Euro-worries are around their average level for the year so far.

Is this good news or bad news? Neither really. 

The attitude towards China seems level-headed: the economy is going to slow, after all, but this isn't necessarily disastrous (see here) and certainly isn't unpredictable, so in the absence of accidents it seems unlikely it will offer another 'worry-peak' any time soon. Conversely, one wonders what it would take to ease concerns about the 'fiscal cliff'? If one is unable to answer that question, this could be sustained as a focus of economic and financial anxiety for months to come. 

But finally, and most obviously, both the Euro and Iran harbour, in their different ways, the capacity to shock and appal economic imaginations at any time during the rest of the year.   

On balance it seems optimistic to expect US financial caution once again to retreat whilst the Fiscal Cliff still looms, and the Euro and Iran hang around, perhaps waiting for their turn again in the limelight.