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Monday, September 28, 2009

PIMCO: Personal Saving Rate to Exceed 8 Percent

by Calculated Risk on 9/28/2009 01:08:00 PM

From Bloomberg: Pimco’s Clarida Says U.S. Savings Rate May Exceed 8%

Pacific Investment Management Co. strategic adviser Richard Clarida said the U.S. savings rate may exceed 8 percent, hurting consumer spending and weighing on the economic recovery.

“I’m in the glass is half empty camp,” Clarida said during an interview in New York on Bloomberg radio. “Traditionally the consumer comes to the rescue of economic recoveries. We’ll see a more subdued consumer.”
“Economic growth will be choppy,” Clarida said. “We see the economy recovering. There will be some quarters above two percent, and others below.”
“At some point as unemployment declines, the Fed will need to renormalize rates,” Clarida said. “It’s too soon to tell the pace at which they will renormalize. I don’t think there will be a Fed hike until late 2010 or 2011.”
The article mentions that future data suggests traders believe there is a 72 percent change that the Fed will raise the Fed Funds rate by April. I agree with Clarida that the Fed will not hike rates until late 2010 - at the earliest.

And here is a graph of the annual saving rate back to 1929(1). Note: 2009 is through Q2.

Personal Saving Rate Click on graph for large image.

Notice that the saving rate went negative during the Depression as household used savings to supplement income. And the saving rate rose to over 25% during WWII.

There is a long period of a rising saving rate (from after WWII to 1974) and a long period of a declining saving rate (from 1975 to 2008).

Some of the change in saving rate was related to demographics. As the large baby boom cohort entered the work force in the mid '70s, the saving rate declined (younger families usually save less), however I expected the saving rate to start to rise as the boomers reached their mid-40s (in the late '90s). This didn't happen.

Perhaps the twin bubbles - stock market and housing - deluded the boomers into thinking they had saved more than they actually had. It definitely appears many families treated mortgage equity extraction as part of their income during the bubble years - and the Home ATM is now closed.

Whatever the reason, I expect the saving rate to continue to rise over the next year or two. And that raises a question: what will be the impact on PCE of a rising saving rate?

I created the following scatter graph for the period from 1955 through early 2009. This compares the annual change in PCE with the annual change in the saving rate.

Personal Saving Rate vs. PCE Note that R-squared is only .125, so there are other factors impacting PCE (like changes in income!).

But a rising saving rate does seem to suppress PCE (as expected). If the saving rate rises to 8% by the end of 2010 (as PIMCO expects), this suggests that real PCE growth will be about 1% below trend per year.

So with wages barely rising, and a rising saving rate suppressing PCE, I'd expect PCE growth to be sluggish for some time. And since PCE is usually one of the engines of recovery (along with residential investment), I expect the recovery to be very sluggish too (what Clarida calls "choppy").

(1)Note: much of this analysis is from MEW, Consumption and Personal Saving Rate in May.