Tuesday, August 4, 2009

Income Down, Savings Up = Consumption Down = Stalled Economy

WSJ reports:

Without government support, personal income is under pressure as the U.S. workweek gets shorter. In a report showing the U.S. unemployment rate rose to 9.5% in June, the Labor Department said the average workweek for production and non-supervisory workers on private non-farm payrolls fell by six minutes to 33 hours -- the lowest since records began in 1964.

The bad job market is endangering a U.S. recovery. A key report last week said the economy slumped April through June by 1.0%, much less than over the winter. But the data showed consumer spending decelerated in the spring. Spending is a big part of the economy. While analysts foresee the economy rising in the current, third quarter, fear for jobs will likely keep wallets tight and hinder the expected growth the rest of the year.

The data Tuesday showed personal saving as a percentage of disposable personal income was 4.6% in June, the Commerce Department said. It was 6.2% in May, 4.7% in April, and 3.7% during March.

Below is a chart of personal vs. disposable personal income (notice the spike in disposable income from last years rebate check... didn't last for long).

Now, the money shot. Real personal consumption per capita vs. national savings.

Catch-22 alert. How do we get a recovery without the return of the consumer... how does the consumer return without a recovery?

Source: BEA

There seems to be some confusion (in my opinion) over this post over at Reddit. User Shenpen states (and has a lot of support from the Econ crowd) that:
This makes no sense. If savings are up, they are in the bank. If they are in the bank, they need to pay interest. They can only pay interest on it if they invest it. Investment creates demand for capital goods i.e. it simply diverts the jobs from making consumption goods to making capital goods.
True, in normal circumstances. Ignoring the practically zero cost of deposits, the issue lies when EVERYONE tries to save at the same time. Call it the "paradox of thrift". In a given moment it is in each participants best interest to save, but IF ALL SAVE AT THE SAME TIME then the overall income pie decreases as the economy slows (i.e. GDP decreases).

Thus while savings is rising as a percent of income, the overall level of income (thus savings) is actually decreasing. We can see this in the actual data. Savings as a percent of income has risen, but overall savings (i.e. investment within GDP) has fallen dramatically.

I will agree that this is one way out of the Catch-22. If investment towards capital goods (with actual use) does increase, then we don't necessarily need consumption to spring back for growth to return.