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Wednesday, December 24, 2008

Savings Rate Starting to Recover

by Calculated Risk on 12/24/2008 11:33:00 AM

Here is a graph of the U.S. savings rate as a percent of disposable personal income.

Personal Savings rate Click on graph for larger image in new window.

It looks like savings from lower gasoline prices is showing up as savings - as opposed to other consumption - and this process of increasing savings is a necessary step towards restoring healthy household balance sheets.

This is one of the areas some analysts really got wrong during the housing bubble. As an example, here is Larry Kudlow in 2006: Riding the Right Curve

Despite the grim picture the mainstream media continue to paint about just about everything ... there’s one thing they just can’t taint: This U.S. economy remains very healthy.
The latest chant is that ... a day of reckoning marked by a housing-price crash and an overwhelming debt burden is headed our way. This is utter nonsense.
Family net wealth, the nation’s true savings rate, advanced 8 percent in 2005 to a record level of $52 trillion.
By focusing on net wealth (inflated by the housing bubble and excessive stock prices), Mr. Kudlow completely missed the biggest story of our time. As I noted then, the savings rate (as calculated by the BEA), is the true savings rate. The savings rate was too low then - and the rate remains too low now - but it is starting to recover.