The Age of Frugality takes a holiday

By J Saft
April 1, 2010

That whole Age of Frugality thing didn’t last long, did it?

U.S. real personal consumption grew in February at a respectable 0.3 percent clip, the fifth straight such monthly rise, a fact widely greeted as news that the recovery is on course. The fly in this tasty soup, however, is income, which in real terms didn’t increase at all, not even by one tenth of a percent.

American’s did this neat trick — spending more while earning the same — the old fashioned way: they cut back on luxuries … like saving.

Savings as a percentage of disposable personal income fell to 3.1 percent from 3.4 percent the month before and down from a recent peak of 6.4 percent in May 2009. In fact, the last time the savings rate was lower was October 2008 when a market maelstrom was convincing so many people, apparently falsely, that something rather dangerous and important was wrong with the economy. In real terms, consumption is only very slightly below where it peaked in 2007.

Astounding.

What happened? Well, from a certain point of view the medicine of reflation worked. Low rates punished savings and also drove the stock market and other risk assets higher. The fall in housing prices abated, leaving many personal balance sheets in better shape. Given the shape of the job market, I think we have an answer to the question of whether asset price inflation drives spending. It did during the boom and it is again now.

Government transfers helped too. They hit $2 trillion for only the second time in history, as payments from the common coffers such as social security and unemployment insurance now comprise more than 18 percent of income.
This does not have to end terribly, but it most certainly does have to end.

As strategies to head off a depression, reflation and social insurance have real merit but in the absence of sustained jobs growth and the income gains it brings, they lack something critical: sustainability. At a certain point, and it needs to be relatively soon, the money that finances the easy rates and high transfers needs to be assured that this is in transition to something else. That is why the recent uptick in Treasury yields is troubling. Not because it denotes inflation — that is not a threat — but because it might just show a waning of faith in the United States as a borrower.

WHAT WILL THOSE BOOMERS DO NEXT?

It is just about possible that Americans’ stopping savings is some sort of a bellwether of a better economy. Perhaps the jobs picture looks better on the ground and people are willing to spend in anticipation of better income growth in the future. Certainly some of the consumer confidence data continues to show a bit of optimism about the future.

The data as it comes out, though, is less reassuring. Private U.S. employment dropped in March by 23,000, according to a report by payroll processing firm Automatic Data Processing Inc. While the ADP does not include government employment, which is getting a temporary boost from the census, the outlook for Friday’s nonfarm payroll data, which does, is a lot less rosy than should be expected for a country in a recovery from an extremely sharp recession.

Another possibility is that the savings data shows the effect of another part of the huge baby boomer cohort moving into a somewhat premature and somewhat involuntary retirement. Many of them may have decided, encouraged by stock market valuations that may not be sustained, to partly fund themselves by running down their assets. Many boomers may well have plenty of assets, but the effects on financial markets of them moving from the asset accumulation to the asset eating stage of life would be very large and not positive for stocks.

Even if consumers don’t know it, the savings rate in the U.S. has to and will rise. There are two basic ways this could happen. The Federal Reserve and policymakers are hoping that it will gradually as employment revives and income recovers. That too would allow government transfers to fall, helping to reassure holders of Treasuries.

A less benign scenario starts with a crisis in the bond market. This drives interest rates up and also collapses the stock market, causing a panicked rise in savings that could make the blip we saw last year look tame.

In the end the information about how it plays out will come from one of two places; the job market or the bond market.

One way or another, frugality’s holiday has to end.

16 comments

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An end to the frugality holiday would mean a decline in consumption. A decline in consumption would translate into even greater increases in unemployment.

There’s only one way out of this mess – restoring a balance of trade and bringing our manufacturing jobs back home. The president believes he can restore a balance of trade by doubling exports. He is wrong. He looks at Germany and asks “why can’t we have an export-driven economy like them?” It’s because Germany has the U.S. as a customer. There are no other Americas out there that the U.S. can use as customers for its exports.

The only way to restore a balance of trade is by raising tariffs and saying goodbye to the World Trade Organization, an organization devoted to the use of protectionist tariffs in favor of two thirds of its member states (but not the U.S., of course) in a bid to redistribute America’s wealth to the rest of the world.

Posted by Pete_Murphy | Report as abusive

We do kind of ignore the WTO. Brazil is always crying about our cotton.

Posted by Jarlent | Report as abusive

Better spend it while you can. Before the cretins who are running our economic system inflate the currency further.

Posted by geoh777 | Report as abusive

Frugality has no reason to return. The same easy credit and abuse of our economy for non-business purposes is continuing unabated, though it has been re-channeled. Americans can save as much as they want or tighten their belts or put it aside for a rainy day or be tightwads – but that won’t stop the Communist Chinese from interfering with our banking system nor stop the bankers from creating ‘wealth’ out of thin air. If anything goes wrong the government has already demonstrated they will also spin ‘wealth’ from thin air at a moment’s notice. Greed and fantasy have become entwined in a fruitless pursuit of a goal that cannot be realized. This suits the Communists fine – because, please note – Communism was not defeated when Reagan said it was. The Russians still have thousands of nuclear weapons pointed at us and others (and we do in reply) and the Chinese are on board as well. Frugality in America? Shall we enourage the women to quit the workforce and go home and sit and spin and sew homespun garments? The United States is maintaining TWO active armies of occupation in Iraq and Afghanistan. The people who hold Treasuries are investing in death.

Posted by cranston | Report as abusive

Frugality means responsibility – in other words working hard, spending a little and saving for tomorrow. The fundamentals of sound finances are the same for individuals as they are for coporations, institutions and governments.

The ugly fat slobs who consume more than they produce (and live in gross debt) will go into an allergic reaction at the mere suggestion of living frugally and responsibly. Americans have exchanged the work ethic for an “it’s party time” mindset and in the process have put themselves on the road to ruin. The next century will belong to the hard-working Asians just as the last century belonged to the (formerly) hard-working Americans.

Posted by Anthonykovic | Report as abusive

Hard work and frugality? The current generation in power (i.e. baby boomers) will have nothing of it. They are the most entitled generation ever, having grown up with the silver spoon of prospertity (earned by their parents and grandparents) in their mouths. They’ve raised their children to be the same entitled group that they are; we deserve everything handed to us, we do not live within our means. We hate “socialism” but we want mommy and daddy (now the government) to bail us out every time we get into financial trouble. “We” are doomed.

Posted by bikebrainiac | Report as abusive

Does the author mean frugal like the government being frugal?

The same government who gave 23.7 Trillion to the big banks and the financial industry since the fall of 2007?

The same government who gave itself a raise last year, while everyone except the fat cat bankers like Goldman Sachs and JP Morgan Chase were laying people off?

The same government who as I write this is paying billions in interest on the backs of taxpayers to the big banks like Goldman Sachs and JP Morgan Chase for doing nothing?

Maybe when this criminal starts acting responsible it will have a positive effect on people spending habits.

Until then, forget about it.

I have absolutely no faith or confidence in this most corrupt beast we call the federal government.

They have taken every opportunity to abuse the limits of the power given to them by consent.

They commit fraud in the treasury markets, financial markets, and precious metal markets on a daily basis!

And worst of all they are taking cues from the mafioso crime families against anyone who would dare stand up to them.

Get ready for the worst, this criminal government shall not be endured and we get people back in office who have actually read the constitution these thugs who hold sway now are going to pay.

Posted by bigkirb1 | Report as abusive

The earth sized Monopoly game is over. Too much wealth has gone to the top of the heap and the only way for the game to continue is to re-deal and start again.
We live in a world of freewheeling market places and seriously restricted worker pay conditions. Something HAS to give.
All of us at the lower end of the game are going to spend out money and enjoy it before big government and business get their greedy, incompetent mits on it. At least I am.

Posted by Blahnii | Report as abusive

James, I am not quite sure about all of this.

Firstly, I don’t know how it is remotely possible to save at present, unless you consider pension/provident contributions savings, which of course it is. The luxuries seem to be dining out, and these days dining in, and a general slowdown in the average households’ metabolism. Dinner has become supper. Brunch has been cancelled until further notice.

Secondly, the cut-off date for baby boomers is 1965, correct me if I am wrong. Regardless, the shelf life is fast expiring. Survival of the fittest requires rent, food, water, energy and medicals. For the rest, they are all luxuries, especially casette players, paperbacks and Marvel comics.

Thirdly, things don’t happen that rapidly – ‘collapses, panicked, blip, tame’. And we have Basel III and the BIS to protect us.

It’s all more like the prodigal son that came to roost.

Posted by Ghandiolfini | Report as abusive

What’s not frugal about cutting back on saving?

Every penny less for TBTF banks to waste is a penny earned.

Posted by HBC | Report as abusive

Yes, we simply must take care of OUR people instead of everyone else, but we have no politicians who see it that way. The two party system has failed as a political model. We need a parliamentary system that gets rid of this winner-take-all and the-winner-is-for-sale system we have now.

And we must stop exporting the wealth of the people to make some ambitious “world leader” look good.

Posted by txgadfly | Report as abusive

Spend, spend, spend now before the dollar collapses.
If you have 100K saved, time to get that new Porsche now!!
Don’t wait.
Life’s too short to wait until tomorrow!

Posted by hockeyguy | Report as abusive

We earned $4.75 on our 50K in a savings account last month.
It looks more like a wasting account.

The government pushes the real rates close to 0 and then that same government is expecting us to save?

Seems to be a fruitless attempt at having a cake and eating it.

Posted by ForeverSPb | Report as abusive

I agree with Pete_Murphy’s comment about the need to increase the manufacturing base of the US economy. But this lofty goal will be fought by Republicans because it is not in the best interest of their most powerful constituency, big business.

America needs to be secretly protectionist and not so myopically “free-trade” driven just as most European and Asian states are. Global economics is somewhat of a board game, and those who stretch the rules, free trade rules in this case, are at an advantage.

Posted by MikePavulack | Report as abusive

Yes Hockeypuck, until tomorrow gets postponed indefinitely and you have to live from the boot of your Porsche. Forever, do you have a mortgage, because that’s the first place where I would put my savings. I find the WTO and ‘exporting of wealth’ comments above most interesting. In this day and age, I think no country should have a two party system, either one run efficiently or a coalition run smoothly. I maintain that the US system is weakening the whole by the second.

Posted by Ghandiolfini | Report as abusive

Yes spend it while you can, as long as foreigners plus foreing sovereign wealth keeps financing the US deficit.

Posted by lambustan | Report as abusive

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