If there’s one thing that nobody expects, it’s a scenario in which the US consumer robustly comes back to save everything.
And since nobody expects it, you should, therefore, consider it a possibility.
In this evening’s Bedtime With BTIG, Mike O’Rourke finds a bright spot in the latest GDP revisions pertaining to the consumer. It’s not much, but it’s worth thinking about. The gist: The savings and income rate in the past were revised higher, and thus there might be a little more dry powder than anyone is counting on.
On Friday, the Bureau of Economic Analysis released its annual revisions to GDP along with the Advance Q2 GDP report. There is a touch of irony in the government telling everyone that the economy during 2007, 2008 and 2009 were all worse than previously reported. Real GDP was revised lower by 0.2%, 0.4% and 0.2%, respectively, for the three years. The key area of weakness was Personal Consumption Expenditures, which were revised down 0.2%, 0.1% and 0.6%. On the positive side of the ledger is that personal income and disposable income were revised higher. “For 2006-2009, the average annual rate of growth of real disposable personal income was revised up 0.3 percentage point, from 1.2 per cent to 1.5 per cent.” The reduced consumption boosted savings. The personal savings rate was revised up for all 3 years from 1.7% to 2.1% for 2007, from 2.7% to 4.1% for 2008, and from 4.2% to 5.9% for 2009.
The main reason that the combination of revisions resonates with us is the result of Hyman Minsky’s work regarding the 1973-1975 and the 1981-1982 recessions. The two recessions were tied for the record of longest post war recessions prior to this one. In Stabilizing an Unstable Economy, Minsky notes “If a pause takes place in the rate at which consumer credit is extended, even as disposable income is sustained or increased, then the savings ratio will be high as in 1975, and an improvement in the liquidity positions of households will take place. With a lag, this accumulation of household liquidity will lead to a jump in consumer spending. Those households that have not been strongly or directly affected by unemployment during a recession tend to increase the ratio of spending to disposable income once an accumulation of liquid assets and a decrease of debt relative to income takes place. As a result of this impatience to spend, a recession with a high savings ratio, such as that of 1975, is followed by a recovery where the savings ratio is low. When the ratio of saving out of disposable income falls, the consumer becomes a “hero” in leading the economy out of a recession. The heroism of the consumer, however, is a lagged response to the high savings ratio of the recession” (p. 34-35).
The 2009 savings rate of 5.9% is not that of the 8.92% of 1975, but it is a larger relative jump from the pre-recession savings rate. While we are confident nobody out there today is prepared to buy into the potential for the consumer to be a “hero,” there is a ring of familiarity to Minsky’s words and it is a very welcome sign that ingredients for such an event, albeit lagged, are emerging.
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