Originally posted at Briefing.com.
It happened again this past week—and no, we're not talking about OPEC's lip service toward a production cap agreement or the specter of a banking crisis cropping up with doubts surrounding Deutsche Bank's capital position. We're talking about the Personal Income and Spending report revealing another rise in the personal savings rate. And we're also talking about another downgrade to the third quarter GDP outlook.
APY? Because the Fed Said So
The increase in personal saving as a percentage of disposable personal income edged up to 5.7% in August from 5.6% in July (it was 5.5% in June). That's a move that might not command a lot of attention in other circles, yet it's a striking move not to be overlooked when taking into account how miserably low deposit rates are.
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Those low deposit rates are effectively a catalyst for the rising savings rate. It's a bit counter-intuitive to think as much. One would presumably be inclined to save more if deposit rates were high, not if they were as low as they are—and they are really low.
For instance, my bank is currently advertising an annual percentage yield (APY) of 0.01% for a standard savings account. If one steps up to the bank's highest tier "Platinum Select Money Market Savings" account, they'll see a whopping APY of 0.15%, assuming the daily balance is $50,000 or higher. That APY slides lower, ranging from 0.10% to 0.05%, with account balances under $50,000.
I probably don't need to tell readers that the real rate of return on those savings accounts is negative. The Personal Income and Spending report pretty much spelled that out, too, showing the PCE Price Index—the Fed's preferred inflation gauge—was up 1.0% year-over-year in August.
Still, savings deposits at commercial banks continue to rise and they have increased sharply since late-2008, which is when the Fed was on its way to slashing the fed funds rate to 0.00% and purchasing trillions of dollars of mortgage-backed and Treasury securities.
It's funny in a sad way how the Fed's desire to spur spending activity with rock-bottom interest rates has essentially sparked increased savings activity with no return to show for it for savers.
This is an important follow-up point to last week's column, which highlighted how the Fed's wealth effect has not had its hoped-for effect on the real economy because roughly 50% of US households don't even own stock.
The 2013 FDIC National Survey of Unbanked and Underbanked Households indicated that 68.8% of households owned a savings account. In other words, a greater percentage of US households are penalized by the low-rate policy than are helped by it.
Getting Looped In
The paradoxical impact of the Fed's monetary policy is that it is prompting income earners to save more of what they earn.
That proclivity has certainly been inspired by the damaging effects of the Great Recession, which brought to light the need to be less leveraged and to have more money saved to meet future needs and/or to manage through a trying time.
At the same time, though, the Fed's policy has spooked earners into saving more because the policy itself is basically a policy for emergency times.
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The Fed will downplay the latter notion, but if communication is one of the Fed's main policy tools, it can be said that it's a tool that has done nothing but throw a wrench into savings plans and has put a clamp on economic activity.
On that note, personal spending (PCE) was unchanged in August. Real PCE, however, declined 0.1%.
The decline in real PCE in August undercut what had been some loftier GDP growth forecasts.
The Atlanta Fed's GDPNow model forecast for third quarter real GDP growth was slashed to 2.4% from 2.8% as the forecast for third quarter real consumer spending growth declined from 3.0% to 2.7%.
The Atlanta Fed's starting forecast for third quarter real GDP, which was released at the beginning of August, was 3.6%.
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This is not an unusual economic trend. It has played out many times before over the last eight years or so, where high growth hopes at the start of a quarter fade progressively as the quarter unfolds.
It is the byproduct of a monetary policy that has a negative feedback loop in it. The Fed spits out ultra-low rates in a bid to jumpstart spending, only consumers and businesses are too bothered by the signaling mechanism of those low rates to do anything with real and lasting, economic consequence.
What It All Means
When income earners save more of what they earn, it slows the pace of economic growth. That's the reality of an economy where consumer spending accounts for nearly 70% of GDP.
Accordingly, GDP growth is destined to remain low so long as the inclination to save more of what is earned remains high.
That is the big picture point here.
One must also not forget either that there is an implicit downgrade of earnings growth expectations that goes along with the explicit downgrade of GDP growth forecasts.
We know earnings haven't been the biggest mover of this market, which sits near an all-time high despite quarterly earnings for the S&P 500 having declined year-over-year for the last five quarters. Still, it's not an uplifting consideration when looking at a market that thinks a stretched multiple today can be rationalized by the strong earnings growth it expects to see in the near future.
