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VIDEOThe New Nation of Super Savers?
By
Josh Lipton Jul 07, 2010 9:10 am
PricewaterhouseCoopers sees the savings rate, which was at 4% in June, rising to 10% in the next two to three years.
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So says PricewaterhouseCoopers, which in a recent report offered us a dramatic prediction: Trends are now emerging that will cause the US savings rate to rise significantly beyond current levels, potentially returning to levels not seen since the 1970s and 1980s, for a sustained period.
Specifically, the PwC crew sees the savings rate rising to 10%, potentially within the next two to three years.
Let’s put that in historical context: Economists remind us that the saving rate fell from 12% in the early 1980s to 1% before the recent rebound. The savings rate rose to 4% in June, the highest since September 2009 although still well below the 50-year average of 6.9%.
But the PwC team expects that rate could climb now to double digits. The move higher, they say, would be driven, most importantly and permanently, by increased uncertainty regarding retirement income as well as restricted access to credit.
Already, say PwC analysts, there's evidence to suggest that expectations of future savings rates are beginning to be embedded in the mindset of the US public.According to a PwC survey, while only 13% of households are currently saving 7% or more of their income, fully 36% of households expect to be saving at this level in five to 10 years.
(For more data on this newfound frugality, check the Wall Street Journal's "Recession Strikes Deep Into Work Force," which reported research from a survey conducted by the Pew Research Center showing 57% of those polled have postponed or canceled a vacation and 70% are going to buy “less expensive brands.”)
The economic implications of such a renewed appreciation for thrift are transformational: Approximately 71% of US GDP is driven by consumer spending. Each percentage point rise in the savings would remove about $100 billion in consumption from the economy. Moving to a 10% savings rate would remove more than $650 billion from current levels of consumption.
Indeed, Gary Shilling, the renowned economist, strategist, and president of A. Gary Shilling & Company, forecasts slow US economic growth over the next decade first and foremost because, he says, of this ongoing shift of consumers from a quarter-century borrowing-and-spending binge to a decade-long saving spree, as he puts it.
Shilling recently wrote to his clients that the case for a chronic rise in the US household saving rate back to double digits is robust for a myriad of reasons.
For instance, he emphasizes that consumers no longer trust their stock portfolios to substitute for saving, an especially salient point with the SPDR S&P 500 ETF (SPY) -- with holdings including Exxon (XOM), Apple (AAPL), Microsoft (MSFT), Johnson & Johnson (JNJ), and AT&T (T) -- now down 7.4% year to date.
More reasons Shilling provides: home equity is no longer available to finance oversized spending, the postwar babies desperately need to save for retirement, and we're suffering with persistently high unemployment.
For his analysis, we also checked in with Miller Tabak’s Peter Boockvar, who is squarely aligned with Shilling on this one: The trend toward savings is a secular one now as consumers rely less on asset prices to drive spending decisions and more on income earned and saved, he says.“People are now going to save more,” Boockvar says. “Spending decisions will be based more on stable money in the bank, not your 401(k),” but the strategist also quickly adds that while a reduction in consumer spending causes short-term pain, it perhaps puts us on a more stable long-term growth trajectory.
“Consumer spending will be a smaller contribution to economic growth than it has in the past,” he says. “That’s reality. But that doesn’t mean things will fall off a cliff. It means that maybe we can generate savings and investment that can increase exports and capital investment.”
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