Tuesday, January 11, 2011

Penny Wise

According to the U.S. Bureau of Economic Analysis, the personal saving rate in the U.S. began rising in early summer and remains higher than any time in the last six years except the early summer months of 2009. In the second quarter of 2009, the U.S. savings rate topped a remarkable 7% of disposable income after taxes, the highest savings rate since 2000.

The saving rate gets very little attention in the U.S. Many investors look at money flow at least in terms of where the so-called smart money is going. However, the saving habits of the average Joe is not in that category. However, personal saving is important in understanding investment and where our economy is heading. By saving and not spending income on consumption, it is possible to increase investment at least to the extent that the money is allocated to a risky asset.

The saving rate could be a good leading indicate or potential bubbles in asset allocation. Looking at the saving rate in the long term, it is clear that in the U.S. we are still consuming most of our disposable income.

From 1959 to 2001 the average saving rate was 7.9%. Saving peaked in the early 1980s near 11%. Then in the early 1990s the long fall to disgrace began. The saving rate actually went into negative territory in 2005, and remaining well below 3% until early 2008. The great saving drought appears to have coincided with the Dot.com build up and then the turn of the century bull market. The saving rate did not rebound until the mortgage debacle brought the financial systems to its knees in 2008. Of course, credit availability has a negative impact on the personal saving rate.

The saving rate is still below the fifty-year average. As such there is little information in today’s saving rate, except that perhaps many people are scared by high unemployment and equally alarmed by the uncertainty in future income streams. As a consequence, most people are not only penny wise, they are pound smarter.

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