Tuesday, June 23, 2009
Where will the US saving rate go? 4%, 5%, 7%, 10%? Nobody knows. To be sure, the personal saving rate is rising...quickly; likewise, the saving rate in the UK, Canada, and Germany have been growing since 2008.
The wealth effects have been smaller in Germany and Canada (second chart below), but the impact on household saving has been very similar. This suggests that the wealth effect is (likely) a dominant determinant of saving patterns. Deleveraging may only be secondary, suggesting that renewed economic growth and a stabilization of asset values may cap the US saving rate below a German-style saving rate, 10%-12%.
The chart illustrates the household saving rate in the US, UK, Canada, and Germany (household saving as a % of disposable income). As households save, global consumption falls (unless income is rising, which we know to be untrue). Why are households saving? Rising unemployment? Deleveraging (reducing debt burden)? Tight credit standards? Loss in wealth?
Across each economy, the answer to all, except for "deleveraging", is most surely yes. The chart to the left compares the wealth effects in Canada and the US as the ratio of net-worth (nominal wealth) to disposable income (Source: Statistics Canada). The wealth effect in the US dwarfs that in Canada.
However, the saving rate is surging in both Canada and the US (see chart above). Likely, there has been a similar wealth effect in Germany (to a much lesser degree) and the UK.
Canadian and German households did not experience the bubble in debt accumulation as did the US and UK households, yet saving rates are rising across the board. The jury is still out on the future of the US saving rate.
To be sure, US households need to unwind the unsustainable debt accumulation in recent years. However, it is not clear to me that the second the labor market starts to improve, and credit standards loosen up further, that US households will not start spending again. All that is needed is a little income growth to generate some consumption growth alongside constant debt payments.