We believe the American consumer is taking the right steps to survive the current crisis - deleverage and increase savings. Of course, these steps do not help stimulate the consumer spending dependent economy in the short-term; and that's fine with us. As mentioned in our June 17 article, "The Savings Rate Must Increase", savings rate must increase in order to reduce consumer debt, restore long-term consumer confidence, and provide capital for overall economic growth.
May's Personal Income and Outlays report, which was published earlier this morning, indicated consumers may be thinking along the same lines. While personal income increased 1.4%, much higher than expected mainly due to government payouts, personal consumption expenditures (PCE) were only in-line with expectations, at 0.3%, which resulted in a 6.9% savings rate, the highest in 15 years. We must note that such a high rate is driven by the higher 'government sponsored' income, which we believe (and hope) will not continue. In fact, wages and salaries (excl. govt. payouts) decreased 10bps for the month. That decline could have been higher if it were not for a 20bps increase in wages and salaries of government jobs. Without government assistance, we may have seen a decline in consumption.
While we view this morning's report as positive, we believe in order for the economy to benefit from higher savings rate, consumers will have to maintain savings rates above 6% for another 3 - 9 months.
On a positive note, higher savings may also drive a potential recovery of the housing market as they can keep inflation and interest rates, therefore mortgage rates, low. However, we believe this will be more than offset by unemployment in the short to medium term.
We continue to expect more savings, minimal growth in consumer spending, therefore a slower turnaround in the GDP, from which the economy and the country will benefit in the long-run.
May's Personal Income and Outlays report, which was published earlier this morning, indicated consumers may be thinking along the same lines. While personal income increased 1.4%, much higher than expected mainly due to government payouts, personal consumption expenditures (PCE) were only in-line with expectations, at 0.3%, which resulted in a 6.9% savings rate, the highest in 15 years. We must note that such a high rate is driven by the higher 'government sponsored' income, which we believe (and hope) will not continue. In fact, wages and salaries (excl. govt. payouts) decreased 10bps for the month. That decline could have been higher if it were not for a 20bps increase in wages and salaries of government jobs. Without government assistance, we may have seen a decline in consumption.
While we view this morning's report as positive, we believe in order for the economy to benefit from higher savings rate, consumers will have to maintain savings rates above 6% for another 3 - 9 months.
On a positive note, higher savings may also drive a potential recovery of the housing market as they can keep inflation and interest rates, therefore mortgage rates, low. However, we believe this will be more than offset by unemployment in the short to medium term.
We continue to expect more savings, minimal growth in consumer spending, therefore a slower turnaround in the GDP, from which the economy and the country will benefit in the long-run.
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