Market Impact: 2009 Watch List – Part 7

How the US savings rate grows?

“Americans are starting to save again rather than relying on capital gains to do their saving for them. The government says Americans set aside $260 billion from their disposable incomes in October, up from about $70 billion a year earlier. That's a step in the right direction for the long term, even though it intensifies the short-term downward pressure on the economy because consumers aren't spending.

The effort to save more amid weak income growth and tight credit will prevent consumers from providing their usual oomph to the recovery. As a result, businesses will not be as quick to expand.

The fall in oil and commodity prices saw disposable income improve and has pushed the savings rate to 2.8% which is an improvement from the 2005-07 figures of less than 1%. The refinancing of the mortgages at lower rates may also help in this process and can also be used to retire credit card debts."

Source: Business Week

This may appear as a negative factor from a consumer spending point of view as in many of the past downturns they have provided the push for recovery as they could borrow at low rates to lend. However in the current context given the individual leverage levels and falling income levels the psyche may not allow such a process.

Source: HSBC

The positive is that it will help soften the effect on the cost of stimulus that has to be paid at a future date. An increasing savings rate will help cushion the leverage risk that the US as a country has and is likely to see a substantial jump in the near future. Increase of this rate to the long term average of 7 to 8% will augur well for the future. How the US consumers tradeoff, is a must watch.

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