The consensus view on Wall Street is that the U.S. consumer is tapped out. After a decade of shopping ’til we drop, saving rates have gotten way too low, and consumer spending is now sliding off a cliff. Former Bear Stearns Chief Economist David Malpass disagrees, however. In his view, saving rates are fine, and the economy is poised for a recovery.
Malpass argues that standard measures of “savings” underestimate household financial strength because they take too narrow a view of “savings.”:
The reported “personal savings rate” is lower in the U.S. than in other countries, but this calculation
is unrelated to actual savings. The reported U.S. personal savings rate compares apples to
oranges—using a very narrow definition of income (which excludes accumulated gains) and
a very broad measure of expenditures. It’s a meaningless comparison, like comparing an
income statement account to a cash flow account on a corporate financial statement. It gives no
indication of actual additions to or increases in household savings, nor does it claim to.
Malpass thinks that financial net worth should be included in the equation and that, when it is, the picture isn’t nearly as bad as the doomsayers suggest:
The U.S. household sector has been saving a lot, as shown by the huge growth in financial net worth over the decades. Until the fourth quarter, the household sector has been adding rapidly to both financial assets and housing, and getting appreciation from them over time. Only the Commerce Department’s “personal savings rate” is low. It uses a narrow measure of income and a broad measure of consumption, so it doesn’t present a meaningful view of savings. Many people need even more liquid savings to prepare for retirement, economic downturns and asset price declines,
but the immediate issue in the outlook is whether low savings will constrain consumption –
we think not.
The problem with this argument is that the savings rate has always been calculated the same way–and it has never been so low. And the flip side of counting financial assets and home equity as “savings” is that declines in these areas can be sharp and radically affect consumer attitudes.
If asset values continue to crash, it’s hard to see how personal consumption won’t, at some point, soften. If consumers decide to save more, meanwhile, this will also hit spending (because the money has to come from somwhere). The key to recovery in this scenario, therefore, is asset prices rising again. So here’s to an immediate stock market and housing market recovery.