What Are the Effects of the Low Savings Rate?

I have said that we don’t have a national savings crisis.  (Warning: that’s an average.  It’s possible that you have a personal savings crisis.  Not my fault if you do.)

A recent paper by Charles Steindel, published by the New York Fed, reinforces my beliefs. (Hat tip to Mark Thoma at Economist’s View.)  Here are some key points:

  • Some of the lower saving rate may be a reasonable response to higher energy costs
  • Households have substantial capital gains not counted in the savings rate
  • The increasing tendency for corporations to buy back stock rather than pay dividends accentuates the reported decline in the savings rate, but has no substantive effect
  • Household wealth is growing–not what you would expect if we are truly spending more than we make.
  • Econometric equations of consumer spending do NOT show that lower savings rate depress future consumer spending.

This is an Alfred E. Neumann report (What, me worry?), but it doesn’t even go far enough.

When an employer puts money into a retirement plan (either DB plan or the employer match of a 401k), that counts as income at the time the employer funds the plan. When the pension assets are distributed to the retired worker, no income is recorded in the national income accounts, because the employer’s contribution has already been counted. But the contribution usually grows thanks to capital gains within the retirement plan. The employer may have put in one dollar, but the retiree pulls out two dollars. That second dollar is never counted as income, even though it is taxed, pulling down disposable income, and may be partially spent, pulling down reported savings.

Business Planning Implications:  Expect continued growth of consumer spending.  The growth rate is likely to be a little lower than during the peak of the housing boom two years, but it will still be positive.

Investment implications:  I’m wondering if consumer durable sector won’t be better than people expect.  Have not snooped into sectoral valuations enough to have a real opinion yet, but it seems worth investigating.