Households saving the fiscal stimulus; possible deleveraging while consumption stabilizes

Tuesday, June 2, 2009

The BEA released the April personal income report yesterday. The headline items were generally better than expected: income grew 0.5% over the monthl, while consumption fell 0.1%. Looking under the hood of the report, I see two distinct trends that may be forming: (1) consumers are saving the fiscal stimulus, and (2) income growth ex transfer receipts grew, setting up a situation where households can reduce debt burden (deleverage by increasing saving) without reducing consumption.

Households are saving the fiscal stimulus

The chart illustrates the monthly saving rate and its 3-month moving average (the trend) since 1959. Saving is on the rise: in April, its 3-month average, 4.8%, grew to the highest level since 1995. This is, in part, due to the American Recovery and Reinvestment Act of 2009 (ARRA, the fiscal stimulus). According to the BEA release:

  • The ARRA added $16.9 billion (March) + $61.6 billion (April) = $78.5 billion worth of income via personal transfer payments (added unemployment insurance) and tax savings.
  • Personal saving grew by $41.7 billion (March) + $131.5 billion (April) = $173.2 billion
  • Personal outlays fell by $33.5 billion (March) + $9.7 billion (April) = $43.2 billion
The added income ($78.5) plus reduced consumption ($43.2) = $121.7 billion, or 70% of total new saving in March and April ($173.2). Households are saving the stimulus, which clearly reduces the immediate impact of the ARRA on economic growth.

Gross income less transfer receipts (social benefit programs) grew in April.

The chart to the left illustrates real disposable income and real gross income less transfer receipts (personal income minus personal current transfer receipts minus contributions for government social insurance). (I calculate real gross income less transfer receipts using the PCE deflator.)

In my view, gross income less transfer receipts is important, as it measures the income growth produced by the private sector, and does not depend on government supplemental income payments - much of which are temporary. It likewise represents more reliable income growth that is likely based on expectations; income growth with which consumers can reduce their debt/income ratio (i.e., deleverage, or reduce debt burden).

In April, gross income minus transfer receipts grew a small 0.06% ($4.8 billion), its first monthly growth since November 2008. To be sure, the April level is meager, and 2.9% of its peak in October 2007 (not shown). However, if income continues to grow, then households can reduce debt burden by increasing saving (debt/income) without further reductions in consumption (Please see the McKinsey study on deleveraging, saving, and consumption).

Under a scenario of continued income growth (gross income less government transfer payments), the economic outlook becomes a little brighter in the wake of a stabilization in consumption. However, this is far from a trend, as a one month data point can easily be a fluke. We must wait and see.

Rebecca Wilder


spencer June 2, 2009 at 11:22 AM  

Do not forget that when you look at the savings-investment data that the increase in personal savings is being used to finance the deficit rather than consumption.

It is part of the big story that is not being reported, that the Great Recession is producing a massive change in the savings-investment flows that probably is generating a sharp secular drop in the US dependence on foreign capital.

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