Negative Consumer Saving in 2005 and 2006

This excellent post in Barry Ritzholtz’s The Big Picture was prompted in part by Alan Abelson’s article, “Spendthrift Nation,” in today’s Barron’s. The key point is that consumers spent more than they made for two years running, 2005 and 2006. The last time this happened was in the depths of the Depression.

Yesterday, DF asked about the negative savings rate. I noted the RM column I wrote last June (Ignore Statistical Oddities at Your Peril) in response. Like all unsustainable things, they will continue until they no longer can. This is often for far longer than expected, but not forever (an admittedly large range of time).

Let’s look at the nitty gritty: In 2006, the US savings rate was minus 1%. The previous year in which the US “enjoyed” a negative savings rate was, well, the previous year — 2005. Prior to that loathsome twosome, we have to go wayback to the Great Depression (early 1930s) to find one single negative savings rate year.

As Abelson points out this morning, “the only time ever before that our worthy population had two years in a row of negative savings, as we did in ’05 and ’06, was in those heartbreak years, 1932 and 1933.” He adds:

The dismal disclosure of just how effectively Jane and John Q. are spending more than they earn has been greeted with the usual serious sophistry from the usual Panglossian pundits. Their contemptuous claim is that benighted worrywarts like ourselves who fret over such inconsequentials as a negative savings rate are just plain silly. And, it grieves us to confess, after carefully mulling their arguments, we do feel, well, just plain silly.

For how could we overlook the fact that savings as officially defined don’t include the equity in houses and investment in stocks. And, as we all know, it is decreed that house prices can go only one way — up. Pay no heed to minor variations in that sacrosanct trend; they probably won’t last more than five, six years at the outside.

A fresh take on the subject comes courtesy of MacroMaven’s Stephanie Pomboy (via Alan Abelson). Stephanie notes not just the negative national savings rate, but two other relevant data points: The ratio of cash to debt, and how that cash and debt is distributed in the country:

The paradox of a liquidity -fuelled stock market in a land rife with illiquid inhabitants is pointed up by the little chart on the right. The one that depicts cash as a percentage of household debt. Which, as is evident at a glance, is shrinking like the proverbial snowball in hell.

That highly graphic graphic comes to us from the excellent Stephanie Pomboy and her irreverent and invariably informative (block those alliterations!) MacroMavens commentary. As she observes, “For all the bragging about the $6 trillion in cash households have sitting on their balance sheets, relative to household debt, this cash cushion is at a record low!”

More disturbing still, Stephanie goes on, is that the households with the cash (and assets) “are not the ones with the debt.” Rather, alas, the top 1% of householders hold 30% of the assets and 7% of the debt, while the bottom 50% hold a mere 6% of assets but a burdensome 24% of the debt.

What Stephanie envisions is that just as “the story in 2005-2006 was the cash buildup on corporate balance sheets,” the story for 2007-2008 might very conceivably be “a similar increase in saving by households, as they endeavor to repair the damage inflicted by the burst of the housing bubble.

What might this mean? The precise timing is difficult to ascertain — but if the “great mass of consumers finally takes a deep breath and cuts back on their profligate spending,” it would not be a particularly positive event for the economy or corporate earnings. And corporate earnings in Q4, we learn this morning, look like they have finally broken their streak of double digits gains.

As to the stock market, it has been driven by liquidity and momentum, and that can continue for quite a while, regardless of the fundamentals. For those who question whether investing contra-to the fundamentals is the way to go, I suggest Ned Davis’ book, Being Right or Making Money.

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