FYI | Jul 16 2009
By Chris Shaw
Since the global economic downturn took hold the personal savings rate in the US has climbed as households cut spending and de-leveraged their balance sheets to ride out the current tough environment. Morgan Stanley Managing Director and Co-Head of Global Economics, Richard Berner notes such an increase in savings runs the risk of weakening the economy further as it signals renewed consumer retrenchment. In this case, however, Berner doesn’t expect a higher savings rate will become a major issue.
There are a couple of reasons for this including current incentives such as a “cash for clunkers” policy in the automobile sector and an expected recovery in the US economy towards the end of this year and into 2010, both of which indicate consumer spending should accelerate in coming months.
Any increase should be at a modest rate though as Berner suggests there is a change in consumer behaviour underway in the US, with the end game being a slow return to greater levels of thrift. This means spending should grow more slowly than income, the result being an increase in the personal savings rate to somewhere between 7-10% in coming years.
While a higher savings rate is a good thing, it isn’t perfect according to Berner as the increase won’t be enough to finance the US Government’s budget deficits, while weaker consumer spending in the US won’t be offset by stronger consumption in the rest of the world soon enough to help rebalance the global economy.
Any change in spending patterns won’t be smooth, meaning the data on personal savings rates will continue to show significant volatility. As an example, Berner notes tax rebates received in May 2008 pushed the savings rate to around 4% at that time in headline terms, but adjusted for those rebates effective savings were negative.
By the end of May this year effective savings had risen to around 4% but the removal of some one-time stimulus measures and rebates should see it slip a little in coming months. Regardless, de-leveraging of household balance sheets is continuing, Berner noting the household debt service ratio, which measures household payment of interest and principle on debt in relation to personal income, has fallen by 75-basis points to 13.5% from its peak of two year’s before.
Berner estimates there may be a further 200-basis point decline in this ratio by 2011 before the de-leveraging process is complete and consumers adjust to the new economic reality, but how deeply this process impacts on households depends on the performance of the US economy. Job opening are starting to tick higher but house prices continue to weaken and credit availability remains low, so signals at present remain somewhat mixed.
Given such a backdrop Berner expects US Treasury securities to remain range bound with yields between 3.0-3.75%, rising to 4.0% by year’s end. Further weak economic data would likely see increased debate about the need for additional fisal stimulus and any increase in this likelihood being priced in by the market should but a floor under yields at around the 3.0% level in Berner’s view.
