Watch for Savings Rate to Fall Off -
The Sign Consumers are Spending Enough to Sustain the Recovery
By Clint Burdett CMC®
From May 2009 peak of 8.2% to April 2011 at 4.9%,
the savings rate has trending down for 24 months.
See uptick in July 2011.
Following most recessions, consumers continue to increase their savings for some months to rebuild their buffer. Since the 1960s, with an exception in 2002, they waited about 12 to 18 months before they reduced their contributions to savings and spent more in the marketplace. So, when do you build inventory expecting demand to surge?
In late 1997 and 2002 after the recession, we saw different pattern where families refinanced their homes to draw cash out to fund their purchases. The expectations was that your house was your bank and ATM. This anomaly to the historical pattern is unlikely to be seen again for generations and after the drop in housing prices, that bank is closed.
The question is will the consumer return to a pattern of rebuilding their buffer first?
The chart below examines our monthly savings rate versus our spending pattern compared to the same month the previous year — how our behavior changes. You can see that the end of a recession (the gray bars) is marked by a significant increase in spending. The black line is the percentage change in Personal Consumption Expenditures (PCE) to the same month the previous year: it moves up rapidly. The red line is the percentage change for our monthly savings rate compared to the same month last year; we had already increased our savings as we realized a recession was imminent.
Our savings rate shoots up during the recession and peaks about six months to eighteen months later. The box arrows indicate when the savings rate peaks and starts to decrease.