Households saved about 0.2% of their income in October, the 2nd lowest level on record. Wall St. Journal article here (sorry, subscription only).
But don't despair. The Beige Book says that the economy is humming along. Well, they don't use the word "humming." That would be very un-Fed-like. Nonetheless, the overall picture is good, but not perfect. Auto sales are flat to down in most places--which explains the continued 0% financing on which I commented earlier.
But really, friends, what is there to say about the low savings rate that hasn't been said already? It could be interpreted as good news. Low savings could mean that people are less worried about the future and expect incomes to be higher and not lower. Of course, for obvious reasons, a low savings rate is bemoaned by many as contributing to our rather uncomfortable balance of payments position. Par for the course, these opposing views separate the bulls from the bears.
The laws of algebra, however, will not be repealed. In open economy macro, we have a little saying: I+G+X=S+T+M which is often expressed as (X-M)=S+(T-G)-I. Ok, it looses something in the translation. (I'd promise no equations in my blog, but I would be bound to break such a promise sometime!) It means that the trade deficit equals the shortfall of national savings relative to investment. This is not negotiable. It's a fact. Let's review more facts:
1. We're running a budget deficit (fact...we'll not debate the pros and cons of it here).
2. Despite the falling dollar, Chinese goods (and those of other countries) are still pretty cheap--and we like cheap. Oh, and the dollar is expected to fall further (possibly leading to somewhat higher inflation).
3. The economy seems to be finally hitting its stride as many of us have been predicting it would. Investment should (at long last) start to recover. Indeed the last few quarters have been good (though the most recent quarter was a little cooler).
4. Interest rates remain low--still a couple points below what would be neutral for growth by my reckoning. Not that there's anything wrong with that for now.
Macroeconomics final exam question (multiple choice since I'm so nice): Predict personal savings based on 1-4 above.
a) above average
b) average
c) below average
I just love how a little bit of economics makes the news less mysterious. Savings will stay low until interest rates return to "neutral" and the dollar bottoms out. Believe me, you don't want that correction to come too suddenly.
Leave a comment