Americans are spending more on their own. Personal spending increased 0.6 percent in September, exactly the same as the previous month and income growth increased by 0.4 percent for both of the months.
The total earnings increased 5.2 percent YoY, and so did earnings. However, due to the reduction of tax credits, income grew just 3.1 percentage points YoY. Spending, on the other hand, closely follows inflation, rising 8.2 percent in September, in comparison against the previous month one year ago.
Growth in spending is generally an indicator of positive growth for markets as it helps pull the entire economy in the same direction. But, this growth engine is getting close to exhaustion since savings have dropped to 3.1 percent of income, and are at the bottom since 2007. In the past, the lowest percentage of Americans’ savings were made in the year 2005 when savings dropped to 2.1 percent, and the average for the year was 2.9 percent. As we approach the threshold of 3% has led to a cooling of markets for housing, which is what you can see in our particular case.
The low savings rate could be explained by the same level of living (spending). However, the highest increase in interest rates on credit over the past 40 years, and the decline in the market for stocks have caused Americans to save historically a lower proportion of their earnings. In this economic environment it is expected that there will continue to see a decline in interest rates for long-term purchases like cars and homes.
But, before you yell “crisis,” !”, you must keep in mind that huge sums of money were saved up during the outbreak. For the 2 years following March 2020, more than twice the amount was saved than in the two prior years (61.4 trillion as opposed to 32.4 trillion). This means that Americans still have money to spend and their debt load isn’t as large as it was in the years 2005-2008.
The drop in savings rates to close to historical lows is a warning sign that it is worth paying more interest to the behavior of consumption of Americans. In light of the savings accrued during the epidemic, growth in the economy (excluding the ailing housing sector) is likely to be a major source of continuing growth in the near future. If we’re right there is no reason to expect the Fed to alter its plans to raise rates quickly and maintain them for a prolonged period.