Monday, October 31, 2011

Savings Rate and Disposable Income

There has been some discussions about the fall in the savings rate for three consecutive months. From last week:
On average, consumers put 3.6% of their hard-earned dough into savings in September, the government reported Friday. It marks the lowest level of saving since December 2007, when consumers stashed away only 2.6% of their income.

The NYT, via Moody's sees two possibilities:
Scott Hoyt, an economist at Moody’s Analytics who specializes in consumer spending, said there were two competing hypotheses as to why the savings rate had dropped. “One is that consumers have just decided that they need to spend — they need to replace the car, the appliance, they want a new wardrobe.” The other, he said, is that the data, which is often revised months down the road, is simply incorrect.
Some consulting firms are optimistic
"We view the decline in the savings rate as consistent with consumers taking a longer view on income trends and not adjusting to the drop in real disposable income in the third quarter," economists from RDQ Economics said.
But if we assume that the savings rate falls with income and that incomes are fallin, well,  the savings rate must fall

The link with real consumption on durables is less clear, though present

Dean Baker thinks it is, indeed, faulty data.

It is more likely that wages were understated in September and indeed the whole third quarter, which means that income growth would be stronger and that the savings rate would be higher.
Baker also points out to a timing effect for car purchases(yep, those are durables). As Reuters reports
U.S. auto sales in October are expected to have hit the highest rate in at least eight months

Car sales were depressed in the second quarter because os shortages related to the earthquake/tsunami in Japan. The third quarter sales were strong as manufacturers had big sales incentives to make up for lost ground.
To have an idea of where the savings rate "should" be, here is the historical rate via Calculated Risk:

To be continued...