Kash Mansori looks at personal income and saving and doesn't particularly like what he sees:
Personal Income and Spending, by Kash Mansori: Yesterday the BEA gave us some new data about personal income and spending for March of 2007. You can find the news release here, but what I want to focus on today are the reasons why I am worried about the prospects for consumption growth in the coming months.
Actually, my concerns can be summarized in a picture. The following graph shows the annual growth in consumption and in labor compensation, with both series adjusted for inflation using the PCE deflator. The red line then shows the savings rate for US households.
As I've discussed before, income growth for households that get their income through their labor has been sluggish during this economic recovery. Profits have been strong, and the income of people who get a lot of their income from their ownership of US corporations has done well...
Consumption growth, on the other hand, has been considerably and consistently stronger. How is that possible? There are three ways. First, households have spent an ever-growing portion of their income... so much so that by 2005 the savings rate actually turned consistently negative for the very first time. Second, some American households have enjoyed strong income growth from non-labor sources. I'm referring mostly to those profits that I mentioned above. Third, many households have used mortgage equity withdrawals to finance their consumption. ... But there are good reasons to guess that all three of these supports for consumption are running out.
The end of the housing boom and concomitant MEW phenomenon has been well documented by others (yes, I'm talking about Calculated Risk), so that source of money is drying up. Corporate profits have grown amazingly well in recent years, but probably can't continue that pace for much longer.
That leaves changes in the savings rate. But if anything, it is starting to seem like we are entering a phase where households will be more interested in moving their savings rate back toward zero, rather than allow it to become more negative. However, to bring the savings rate back toward zero (not to mention positive) households will have to allow several period elapse with rates of consumption growth below the rate of income growth.
Put it all together, and it seems quite likely to me that we're in for a period of slower consumption growth. And given the importance of consumption in the US's economic growth right now, that does not spell good news for the economy as a whole.
Worries about consumption didn't stop Ben Bernanke from calling for a higher savings rate. Here's Brad DeLong with details of his comments at the press conference after yesterday's speech:
Ben Bernanke Repudiates Bush Administration Deficit-Spending Fiscal Policy: From the Wall Street Journal's Washington Wire:
Washington Wire - WSJ.com: Bernanke Advocates More Saving: Brian Blackstone reports on Bernanke’s speech in Montana.
Federal Reserve Chairman Ben Bernanke said that U.S. lawmakers should aim economic policies at boosting U.S. savings, the lack of which is the primary source of the U.S. trade deficit. “Saving is critical,” Bernanke said in response to questions after a speech at Montana Tech. He said the trade deficit isn’t a reflection of the quality of U.S. goods and services but rather a result of the fact that the U.S. invests more than it saves and the rest of the world is a “net saver.”
“That saving is sloshing around the world,” Bernanke said, and is one reason that U.S. real long-term interest rates remain “very, very low.” “We won’t always have that,” Bernanke said in reference to the high rates of foreign saving that are coming into the U.S. That’s why it’s important for the U.S. to find ways to boost domestic saving, he said.
"That the U.S. invests more than it saves" is economist-speak for (a) American households and businesses don't save very much, and (b) the government spends a honking amount more than it collects in taxes. "Aiming economic policies at boosting U.S. savings" is economist-speak for (a) raising taxes, (b) cutting government spending, and (c) encouraging households to save more.
While all of those are healthy long-run developments, in the short-run they would slow output growth and this is not the time to be pushing output downward. This is the problem with cutting taxes instead of paying off debts when times are good.