August 2010

Watch for Savings Rate to Fall Off -
The Sign Consumers are Spending Enough to Sustain the Recovery

By Clint Burdett CMC®

From May 2009 peak of 8.2% to April 2011 at 4.9%,
the savings rate has trending down for 24 months.
See uptick in July 2011.

Following most recessions, consumers continue to increase their savings for some months to rebuild their buffer. Since the 1960s, with an exception in 2002, they waited about 12 to 18 months before they reduced their contributions to savings and spent more in the marketplace. So, when do you build inventory expecting demand to surge?

In late 1997 and 2002 after the recession, we saw different pattern where families refinanced their homes to draw cash out to fund their purchases. The expectations was that your house was your bank and ATM. This anomaly to the historical pattern is unlikely to be seen again for generations and after the drop in housing prices, that bank is closed.

The question is will the consumer return to a pattern of rebuilding their buffer first?

The chart below examines our monthly savings rate versus our spending pattern compared to the same month the previous year — how our behavior changes. You can see that the end of a recession (the gray bars) is marked by a significant increase in spending. The black line is the percentage change in Personal Consumption Expenditures (PCE) to the same month the previous year: it moves up rapidly. The red line is the percentage change for our monthly savings rate compared to the same month last year; we had already increased our savings as we realized a recession was imminent.

Our savings rate shoots up during the recession and peaks about six months to eighteen months later. The box arrows indicate when the savings rate peaks and starts to decrease.

Click to see larger image - updated monthly

We can make a few general observations from the chart:

• The Great Recession has been so dramatic that we can expect many families had to use savings and as we recover, it will take longer to rebuild buffers.
• Once the savings rate drops off we can assume that families are confident they can begin to spend beyond essentials.
• It is very unlikely that folks can return to accessing equity in their homes to draw cash out to fund spending.

Most commentators are expecting the savings rate to peak about 8%; in July 2010 it was 6.4%. I think we are going to return to the spending/savings pattern evident prior to 1995.

Therefore the decision to build inventories anticipating the consumer is returning to the market quickly should be made carefully. The 1974-75 recession had many characteristics of the Great Recession, and it was a full 25 months from the point people began spending to when they had rebuilt their buffer and were confident they could spend on nonessentials.