The past week produced its share of headlines and some trading drama to boot. There was the State of the Union Address, the FOMC decision, earnings results from Apple, Facebook, Microsoft, Amazon.com, Boeing, and Alphabet, the jump in market rates, and the January Employment Situation Report.
This week's column for The Big Picture isn't going to cover any of that -- not directly anyway.
Instead, we're talking about the personal savings rate reported in the December Personal Income and Spending report.
Stay with us now.
We know this week's topic isn't as thrilling as discussing Amazon's revenue growth, yet the two have a little something to do with one another. More importantly, the personal savings rate has a lot to do with the big picture.
The personal savings rate as a percentage of disposable income dropped to 2.4% in December. That number might not mean much on its own, yet it should pique some curiosity when we tell you that it is the lowest personal savings rate since November 2007.
Why does that date matter? The Great Recession started in December 2007, according to the National Bureau of Economic Research.
To be clear, by referencing that date we're not suggesting a recession is imminent, yet there were some painful lessons learned during the Great Recession that were a byproduct of consumers having too much debt and not enough savings.
What has driven the decline in the personal savings rate? The answer is debatable.
Allow us to regurgitate some thoughts we shared in an August 2016 piece that appeared on this page entitled Table 10 Is a Hot Spot.
In the latter piece, we noted that people, by and large, spend out of savings for one of two reasons: (1) because they have to or (2) because they feel comfortable about their income prospects, which often flows from their comfort level about job security.
If consumers are spending out of savings because they don't have enough income to cover their basic needs, that is a problem that will ultimately resolve itself in weaker economic growth. There is only so much savings to go around.
If consumers are spending out of savings because they are confident about their income growth prospects, then the U.S. economy should see an acceleration in growth considering personal spending accounts for roughly 69% of real GDP.
It is reasonable to argue right now that the drop in the personal savings rate has been a byproduct of consumers feeling better about their income growth prospects. That's because the labor market has tightened and because earnings expectations are rising.
Separately, one could also assert that consumers owning a home, or stocks, are also feeling an urge from the wealth effect to spend out of savings.
The University of Michigan Index of Consumer Sentiment report, which was released on Friday, helped validate our assumptions. To wit, it was written in the report that:
"...the motivating force behind purchase decisions has shifted from discounts on prices and interest rates to increased confidence in future job security and growth in wages as well as financial assets. This renewed sense of confidence was responsible for the recent declines in savings rates."
A Revolving, and Recurring, Problem?
Readers may now have the answer as to why the personal savings rate has dropped like it has, but why is that drop even important to consider?
Basically, the confidence in the outlook reflected today in the low personal savings rate could very well end up transitioning to a major risk factor for the economic outlook.
It is a latent risk factor, because a low personal savings rate like the one seen today means consumers don't have much cushion to deal with a loss of income that would impede their ability to keep spending and/or to pay back debt.
Debt levels are rising, too, especially revolving debt (think credit cards). When people are feeling good about their job/income prospects, they spend more on credit. In turn, banks become more willing to extend credit when they are more confident about a borrower's repayment capability.
Notably, revolving credit levels are back to 2007 high levels, too.
Revolving credit as a percentage of real disposable personal income is lower today than it was at the peak of revolving credit in 2007, but it has started to increase in recent years as consumers have taken on more debt.
More Spending, Less Saving
The U.S. consumer's propensity to spend has been well chronicled. Saving money tends to take a back seat, either because there isn't anything left to save or because the pleasure of spending for immediate gratification takes precedence over saving for long-term security.
For a couple of years now, real PCE growth has outpaced real disposable personal income growth, not unlike it did in the years leading up to the Great Recession Mindful of that, it makes sense that the personal savings rate has dropped and revolving credit levels have increased.
Sure enough, the drop in the personal savings rate has coincided with real PCE growth outpacing real disposable income growth.
With the passage of the Tax Cuts and Jobs Act, there is some hope that there will be a nice pickup in real disposable income growth. Reduced tax rates, though, aren't the only part of the equation. The inflation rate will factor into matters, too.
Personal savings rates, though, aren't going to rise much -- if at all -- if real PCE growth keeps outpacing the growth in real disposable personal income. Said simply, if one spends more than they make, something has to give and that something is savings.
What It All Means
Consumers are spending more these days and the uplift in real GDP growth shows as much. The 3.8% growth rate in real PCE in the fourth quarter was the best growth since the second quarter of 2016 and well above the prior 10-quarter average of 2.7%.
Amazon was certainly a beneficiary of that spending growth, as was Apple and many other companies, but it's safe to say it came at the expense of personal savings.
When everything looks good in terms of job security, saving money isn't always the top priority. It isn't now and that's an objective view backed up by the data.
The low personal savings rate isn't going to win much headline share in a week like the one that just transpired, but it's a notable development in considering the big picture.
A low personal savings rate is signaling that we are running a risk of spending ourselves into a financial and economic problem down the road.
[Correction: The original post contained a chart showing real disposable income as a percentage of outstanding revolving credit when it should have shown a chart of outstanding revolving credit as a percentage of real disposable income. The chart has been updated.]