Fellow Shortrunners,
In recent articles, some have argued that
Americans are becoming increasingly less frugal. The saving rate, as
reported by the Bureau of Economic Analysis in its December
National Income and Product Accounts (NIPA), was
in fact -0.8%. This means
that during the month, Americans spent 0.8% more money that they earned as
income. This would mean that Americans are either using their
accumulated wealth to make purchases, or they are borrowing on credit, but
I would argue that this is nothing to worry about.
For starters, some economists have noted that the NIPA understates the current level of US saving. The reason for this is that the NIPA doesn't take into account income in the form of capital gains. Realized capital gains can be thought of as income that someone gets from selling something for more than they bought it. This could be a stock or a piece of land or a house. What's more, the tax that is paid on these gains is counted as a subtraction from income. If we take this into account we see that the saving rate hasn't actually been declining over the past decade; it has remained pretty constant around 10%.
In fact, this is a rather normal rate of saving. John Maynard Keynes, arguably the most famous economist of the 20th century, had realized the importance of an economy's savings rate in his 1936 work "The General Theory of Employment Interest and Money." Here, he noted that a normal rate of saving for an economy would be within the range of 8 to 13%. Using his definition, we can rest confidently. Or can we?
Everyone who owns stock, and most people who don't, still know that recently the market hasn't been performing very well at all. In fact, it has done poorly enough that income growth isn't keeping up with consumption. With the Fed dropping interest rates, we can expect consumption in the short-term to pick up which should raise the disparity. Even more disturbing is that despite our new understanding of the saving rate, the level of consumer credit is still rising (people keep borrowing money). Can we explain this?
I would argue that there are several reasons for this. A lot of people have become involved in the stock market. Fifty years ago, a very small percentage of the US population owned stock. Now, well more than half own stock. As the market ran up over the past decade, many people have been interested in getting a piece of the action, investing despite having other debts. Many people own stock and hold mortgages and credit card bills at the same time. Although they may not realize it, they are essentially assuming that they will make a better return in the market than they will be paying on their debt. This expectation of profit is sometimes known as speculation, and in high levels it can be dangerous. This may help to explain some run up in credit, but why could we expect to see increased spending?
To understand this, we really need to look at what motivates people to spend their money. There are several different theories of this, but one of the most prominent today is attributed to two economists, Ando and Modigliani, who won a Nobel prize for their work on what is called the Consumption Function. Before they came onto the scene, most people argued that spending was based on your level of income, or on your desire to "keep up with the Joneses," or stay on the level of your neighbors. Ando and Modigliani argued that people save money most of their working life and spend out of savings in retirement, in what they called the life-cycle hypothesis. If we assume their theory is true, it would be especially evident now as the baby-boomer generation ages and begins to spend down a portion of their accumulated wealth.
What's the
point of all this? Well, I really just wanted to show that the
economy hasn't undergone some fundamental change to one in which people
don't save money any more. The look at the rising credit and the
life-cycle hypothesis give the other side of the story. Perhaps
spending and saving patterns haven't changed much in the past decade, but
that doesn't mean they won't change. This can have important
implications for the economy and certainly will influence the financial
markets.
Sincerely,
Daniel Hicks
Economic Releases
The data section provides charts and data for the most important economic indicators.
Retail Sales: 0.7%
-
During the month of January, retail sales expanded 0.7%, joining a rash of other positive indicators for the month. In light of this, many people have argued that the economy may have changed course and begun to grow once again. This news has been taken with mixed reviews. Most people would like to see further interest rate decreases, but these clearly won't take place if inflationary pressure and consumer spending fail to wane.
Business Inventories: 0.1%
- Last December, business inventory growth slowed to 0.1%. This is good news as inventory accumulation can be dangerous for reasons related to inflation and to the overall business climate. The ratio of inventories to sales remained constant yet again at 1.36, indicating that despite recent accumulation, sales have been rising as well.
Jobless claims: 352,000
- Jobless claims declined last week to 352,000. Despite this, the general trend has been one of an increasing level of jobless claims. This should become evident in the next unemployment figure.
Import and Export Prices: -0.4% and 0.2% respectively
- On the international scene last month, US terms of trade improved. This will have several effects. First, declining prices for imports, particularly things like oil, will help to quell inflationary pressure. On the other hand, increasing export prices (while good for profits) may end up decreasing the amount of exports, i.e., the trade balance may worsen.
NAHB Housing Market Index: 58
- The NAHB Housing Market showed signs of renewed strength in February, coming in at 58. A good portion of this is to be expected as overall economic activity picked up in January. Furthermore, mortgage rates continue to fall as participants expect future rate cuts from the Fed. Housing sales are important indicators for several reasons. First, because of their dependence on financing (most people don't pay for homes in one lump sum, they pay over a period of time by borrowing), the housing market is very sensitive to swings in interest rates. Secondly, home sales are substantial. Homes are expensive purchases and the expense weighs in as a heavy portion of total consumer spending. Thus changes in the level of home sales can dramatically impact GDP.
Housing Starts: 5.3%
- Housing starts rose a large 5.3% last month. The rise in housing starts is a clear indicator that expectations for future housing activity have picked up. This is a good sign that the economy is far from falling into recession contradicting several gloomy predictions as of late.
Industrial Production: -0.3%
Capacity Utilization: 80.2%
- Industrial production dropped 0.3% in January, largely because of significant declines in automobile production and utilities output. Because of declines in output, capacity utilization fell to 80.2%, well below inflationary levels. The past few months have been hard ones for the US manufacturing sector and for automobile production and sales in particular.
Producer Price Index: 1.1% (Core: 0.7%)
- The producer price index far exceeded expectations, rising 1.1% in a one month period. This level of inflation hasn't been evident in the economy in over a decade. Some have argued that a few of the components of the index may be overstating inflation, but regardless, the overall level of prices has risen. We will have to watch and see if this number is merely an outlier, but let's keep our fingers crossed.
Know of an indicator I don't cover but
you think I should? Have suggestions as to how I cover the
indicators or to how the newsletter is constructed? Please let
me know; I really want to make this a useful tool to all of my
subscribers.
Fed Watch
The Shortrun Fed Watch section contains the most recent beige books as well as speeches by Fed Governors with a brief description of each speech and in some cases a Shortrunner's opinion on its significance.
Curious as to the records of our Fed watchers? Visit the Fed Watch opinions on monetary policy section to see whose predictions have been on target.
Articles / Book Reviews
Newest Articles:
Looming
Stagflation
- by Richard Carew
2001:
A Monetary Odyssey
- by Alex Rothenberg
Newest Book Reviews:
Murder
at the Margin by Marshall Jevons
- reviewed by Kelly Bryan
The
End of Work by Jeremy Rifkin
- reviewed by Ricky Carew
Site News
Interested in being a contributor to the short run? Show off your economic knowledge and breadth of learning by reviewing an economic text. Simply visit the short run's reviews section and submit your own review. If accepted, we will publish it on the website and post links to it both on the front page and in the newsletter.
If you would like to unsubscribe, simply reply with the word unsubscribe in the subject line. - DLH
|
Get Stock Quote: Enter Symbol(s) |
SCREEN SAVER
Do you like our intro movie? Then download the
shortrun.com screen saver now!
|
|
Issue #38
There are currently 166 subscribers to the short run weekly
