By Andrew Kaplan, a hedge fund manager:
It has become fashionable among equities managers of the bullish persuasion to argue that a strong recovery in GDP will occur in 2010 because the “structural adjustment period” of moving back to a more normal savings rate has been completed. We’ve gone from a savings rate of barely 1% in 2008 up to 4.2% in July (ok, so the argument sounded better when the number was 6.2% in May, but still…).
The story goes something like, “consumers took a little time to recognize that their home equity had disappeared, but now they’ve adjusted their savings rates toward the desired level to reflect the fact that they need to save a larger proportion of income for retirement…so this effect will no longer be a drag on growth in coming quarters.”
This is the kind of conventional wisdom which could only emerge among folks in the 99th income percentile who spend their time primarily with other folks in the 99th income percentile. You don’t have to look at the data (mortgage delinquencies, foreclosures, credit card defaults, bankruptcies) all that hard to see a very different picture. In fact, it is almost certainly true that the savings rate for 99% of the US population is negative. These people (a/k/a “all of us”) are drowning. And to the extent that our savings rate is less negative than it was one or two years ago, that simply reflects the reality of reduced home equity and unsecured credit lines rather than any conscious effort to reach a “desired level” of savings.
A little data might help here. Unfortunately, there really IS no good data on PCE (personal consumption expenditure) and savings stratified by income percentile. There are a couple of surveys, the triennial “Survey of Consumer Finances” by the Federal Reserve and the “Consumer Expenditure Survey” by the Bureau of Labor Statistics, but the self-reported data is laughable. For 2007, the Consumer Expenditure Survey showed a personal savings rate of 18.4%. In the same year, the Bureau of Economic Analysis, which calculates the savings rate as a residual from actual income and expenditure data, showed a savings rate of 1.7%. Either the Consumer Expenditure Survey does a poor job of sampling, or people who fill out surveys are really big liars.
Fortunately, there IS some pretty good data on income stratification in the United States, and a few assumptions can help shed some light. Economists Thomas Piketty and Emmanuel Saez have made careers of studying US income inequality using IRS data, which goes back to 1913. The most recent data available (for 2007) showed that the top 14,988 households (0.01% of the population) received 6.04% of income, the highest figure for any year since the data became available. The top 1% of households received 23.5% of income (the second highest on record, after 1928), while the top 10% received 49.7% of income (the highest on record).
The fortunate 14,988 had an average income in 2007 of $35,042,705. They had an average federal tax burden, according to Piketty and Saez, of 34.7%, leaving them after tax income of $22.9 million. If you assume a 50% savings rate among this group, you get total savings of $171.5 billion. This is nearly ONE HALF of the total savings for the entire country implied by a savings rate of 4.2% ($365 bn) reported in this month’s Bureau of Economic Analysis data.
I’ve never actually had an after tax income of $22.9 million, so I couldn’t say for sure whether a 50% savings rate is a reasonable assumption, but I’m going to go out on a limb and say that it is, just based on the pure physics of spending money. Buying cars, clothes, and fancy dinners, even at Masa, won’t get you there…the math doesn’t work. Buying a private jet could get you there, but most people, even rich people, don’t buy one of those every year. The only EASY way to spend more than 50% of $22.9 million on an annual basis is to buy lots of houses…but the definition of “personal consumption expenditure” used by the BEA specifically excludes purchases of real estate. They use an imputed rent calculation instead. So I’m going to stick with my 50% number.
If we expand our survey to the top 1% of all households, we find an average income of $1.36 million for 2007. These folks had an average federal tax burden of just under 33%, so their after tax income averaged $916 thousand. If you assume this group had a savings rate of 33%, you get total savings of $452 billion (remember, $171.5 bn of this comes from the top 0.01%, we’re assuming a savings rate of around 25% of after tax income for the “poorer” 99% of the top 1%) This is more than 100% of the personal savings of the entire population, according to the BEA data. It implies that 99% of the US population still has, on average, a negative savings rate of around 1.3%. If you subtract the next nine percent, which likely still has a positive savings rate, the data for the bottom 90% becomes even more depressing, implying a negative savings rate of close to 5%.
Sorry, but the calculation seems to miss that total savings of the us population is hovering around 500bn a month not a year. So there should be some left for average Joe. Or is the average income mentioned in the post monthly also?
Buying a minor Cassat or two would deplete that excess at a smart pace, though I believe the auctions are no longer establishing fresh records for fine arts.
But aside from rarities, I expect your premise holds very well.
sorry, I misread the BEA data myself. Income is stated as monthly at annual rate.
Aren’t you mixing flow and stock?
Of course savings on the bottom 99% have increased. I offer two data points:
1. All of you lower 99s can’t get a loan. And most of you are paying your bills. Debt will fall.
2. Spending is down far more than employment. Probably because you can’t get a loan.
As for the .1% savings rate, your analysis of 50% savings may be true “because it is hard to spend that fast”. But that savings rate may be down from 60% because those rich people have so much more time on their hands. There is actually evidence of that.
We will delever. It will take time.
Wouldn’t the IRS have this sort of information? They have the income side and they have much of the retirement savings side since most of those for normal people are tax deferred (e.g. 401k, IRA, etc.)
I guess they wouldn’t have the consumer expenditure side but you would at least be able to calculate a stratification of retirement savings by income. Not perfect, but few measures like this are.
I have a few questions that, if answered, would make this a whole lot more informatative:
if the US population is about 300 million, what percentage of it is retired, what percentage is below 18 and what percentage is in school? how do those % of earners look then?
if this portion of the top earners is earning this much, how much are they spending? how much of total spending does this make up? would it be fair to say that, while the bottom 90 percentile’s savings rate is bad, what is their share to total consumer spending (ie 70% of the GDP) vs. the share of the top earners? perhaps the bottom 90% aren’t all that relevant from either a savings or a spending perspective? i can’t conclude that the negative savings rate of the bottom 90% is bad news unless i understand this on a relative and historical perspective.
of course you are working from the data that’s available, but in what realm is data from 2007, the absolute peak of the bubble, relevant to today’s economy and reports about savings rate changes in reaction to the current financial crisis? without clarification from the author, i can only conclude that this information is being distributed to mislead or misinform the reader…
i suppose there could be exceptions, but is it really plausible that a “hedge fund manager”, such as the author of this post, is in the “all of us” category? i find this both misleading and irritating and it makes me think that other aspects of the report will be misleading as a result….
I agree with the comment that savings are up because it has become very difficult to get an equity withdrawal loan.
After that, I agree that the process of deleveraging will take some time. It isn’t just a matter of immediately paying off the unpaid balance, it’s a matter of accumulating the unpaid balance while simultaneously reducing discretionary expenditures.
It is increasingly clear that the media will write to a headline rather than a fact. There’s the rub, the so called journalists don’t have a clue. When they do have a clue they don’t care about anything but hits and/or readership. So sensational ‘news’ sells something. Sadly someone will ultimately discover that the something doesn’t fit in the budget.
Anyone for ultimate collapse?
Because it will be necessary to make up for all the un-saving that occurred during the savings rate slump, the rate is going to rise above what used to be considered normal for a period such that the integrated amount of savings — the area under the curve, not just the height of the current value of the curve — returns to normal.
«the Financial Times has decided to become important paper in the US, and the caliber of the paper as a whole has deteriorated. Yes, it still has some excellent reporters and columnists, but it like the Times has taken to writing up tidbits from influential sources with a notable lack of critical thought.»
Thanks for the information
Pigeon – Maybe I’m missing something, but if the savings rate equated to the absolute dollar figure per month (you claimed $500 Billion), on an annual basis, Americans would have the ability to save $150 trillion (since $6 trillion a year in savings at a rate of 4% means that you could extrapolate it out 25x to get to a net 100% income figure).
Since that’s about 10x GDP, methinks not.
capital gains must be excluded from the income figures in order for them to be comparable with BEA savings rates. It makes a material difference, particularly for the top 1% and 0.01%.
I don’t know if Shaquille O’Neal is the typical 0.01%’er, but according to the data that came out of his divorce he was spending around 11 mil of his 20 mil salary. How much of the remainder was saved is not so clear. $24,000 of gasoline a month – he must get a Christmas card from OPEC. http://www.signonsandiego.com/sports/20080127-9999-1s27gallery.html
You make a good point that the upper 10% does most of the savings. However if the rest of the population was -0- then 50% probably saved and 50% spent more than they saved.
Someone a couple years ago said we all know people who make $300,000 a year and cant save as well as people who make $30,000 and save regularly.
A couple other observations from looking at wealth data
– most wealth is with college educated people by about 3 to 1 margin
– under 35 yrs only way to stop spending 120% of earnings is to eliminate credit
– Lots of people who would save spend every dime on huge homes 6 bedroom 5 bath for a couple or couple with 1 child etc. After Mortgage comes Insurance, taxes, utilities, maintenance and repairs. If anything is left it is hot tub time.
– a sign of a broke person is the car they are driving. If Mercedes, Lexus, BMW, Escalade … they spend whatever they make. 9 out of 10 that is.
Ah, but you are looking at income only, and not wealth, and forgetting about all the people that have massively negative savings rates.
It’s quite possible that the savings rates of high earners has remained high, while the savings rates of the *wealthy* has sharply decreased or even gone negative. I suspect there are a lot of wealthy idle folks out their that are burning through their savings faster than it’s growing, especially in this low interest environment. $50K/yr income from investment income, and $500K/yr expenditures to keep up an upper class lifestyle leads to a -1000% savings rate.
I offer no evidence for this, but it’s something to consider in your analysis.
Forgive me, I may not have made myself as clear as I’d hoped (I mistakenly sent Yves a half-finished draft of what I’d written…oops!). I’m not claiming that the savings rate for the bottom 99% hasn’t risen in the past year. It has. It has most likely gone from a large negative number to a smaller negative number.
But I am arguing that it’s not really right to call that “savings,” both for the obvious reason (if you spend more than 100 cents out of every dollar you make, that’s not “saving”) and for a less obvious reason…namely, that in many cases what has really occurred is NOT that someone has “decided” to save more, but rather that someone has been forced by his/her creditors into consuming less.
Nobody is ignoring the bottom 99%. Somebody has to do the work.
Average income for top 1 per cent seems high.
Are you quite sure of this stat?
Interesting speculation (even for a half-finished draft!). Clearly what we need is better data to make sense of what is happening–to align different definitions of “saving”, and to get data by household income/wealth categories (and these last two may be very different).
Great post. At first blush, the math seems irrefutable (very simple, like 1 + 1 = 2) … but I will think more about it and see if I can poke any holes. It also seems consistent with recent mortgage and credit card delinquency statistics, which have been very bad.
I am not totally convinced by the argument, but it is interesting to see just how much the wealthy dodge taxes. Savings as the BEA show includes repaying debt which I suspect accounts for quite a bit in the lowest 90 percent, in contrast a lot of the savings associated with the upper 10 percent is linked to equities and bonds. Perhaps the most important point to note is that the BEA savings rate no longer really reflects potential consumption or rebalancing of GDP. Much of it is just casino swings and inability to perform equity withdrawal will have a much bigger impact on consumption.
Important points most of the comments ignore.
Most of you are fantasizing that the working poor can save. How would they do that?
The Fed+Treasury in all of their wisdom, have reverse-engineered the leveraging that got us here in the first place. So, let’s say for a minute the average joe sixpack can save some money every month. It does him no good because his government has obligated his savings to debt.
Well we better take bloody good care of these people, for they control our future.
Skippy….hot towel sir?