Friday, October 28, 2011

Personal Savings - Running on Empty

The plot thickens and it aint pretty. As noted in a recent post, consumer expectations for the economy are the lowest in 31 years. At the same time we see in retail sales reports that people are spending as if everything is hunky dory.  There is a very unusual and striking disconnect between consumer attitude and behavior. "I know things are ugly and going to get worse. Hey, check out at my new IPhone 4s. Cool, huh?!"

Well, now we can add another troubling piece. We are finding out that this robust spending is at the expense of personal savings (see chart below). 

The personal savings rate is now at it's lowest level since before the start of the financial crisis in 2008. As you can see, everyone tightened their financial belts for a few months and started saving more -- then gradually savings were chucked out the window. Now the savings rate is plunging. It's easy to predict that very soon there will be no personal savings to buy unnecessary stuff. Not exactly an encouraging picture for the economy at large.

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