“More and more, people want to live now.” - Sheila Padden, Padden Financial Planning
Last week we learned that 4th quarter GDP grew at a 2.6% annualized pace. Although the headline number fell short of expectations, beneath the surface the report revealed strong and rapidly expanding domestic demand. Consumer spending rose at an annual pace of 3.8%, and a widely followed measure of core demand, “real final sales to private domestic purchasers”, accelerated to a 4.6% annualized growth rate. American households and businesses are spending money again.
In the days following the GDP publication we got another data release that we thought provided some interesting context. The personal savings rate has now fallen to its lowest level in over twelve years, and is basically at all-time lows save for the brief period twelve years ago.
A diminished appetite for savings would seem psychologically consistent with increased spending and an overall boost in consumer sentiment. Following the financial crisis Americans entered “retrenchment” mode and spent nearly ten years focused on shoring up their lifestyle, reduced debt loads and saving money for longer-term purposes. It appears this mindset is finally melting away. We think there a few potential explanations for this.
Savings rates are positively correlated with fear
Savings rates are obviously positively correlated with fear. When the future is uncertain and financial stability is in question humans are far more willing to tighten the purse strings, reduce spending and increase savings. In contrast, when consumers feel confident and safe they are far more likely to extend themselves financially by spending all of their income and potentially even incurring debt in the process. As the chart below shows, the American consumer is feeling good.
The wealth effect of a rising stock market
Investopedia defines the wealth effect as, “the premise that when the value of stock portfolios rises due to escalating stock prices, investors feel more comfortable and secure about their wealth, causing them to spend more.” There is no doubt that this dynamic is playing a key role in the recent collapse of the savings rate. Lawrence Glazer, managing partner at Mayflower Advisors, was recently quoted by the Wall Street Journal as saying that his clients’ “assets are doing the saving for them.” That’s a great way of describing how many people feel, or at least how they act, when their stock portfolios are increasing in value. Why continue saving money when your wealth is increasing either way?
Debt levels are far more manageable now
This is somewhat anecdotal, but in the ten years since the financial crisis the average American household has gained a lot of equity in their homes and has been successful in retiring a good amount of consumer debt. As such, the burden of debt service on their month to month disposable income has lessened quite a bit, and debt reduction (in itself a form of savings) is no longer a priority.
While many of the things discussed above are incredibly positive, abandoning your long-term savings plan is not the proper response. Unfortunately as the opening quote suggests, many people view saving money as an optional sacrifice rather than a moral responsibility. Rather than planning for the future, their instincts are to seek immediate gratification and “live now” instead. This creates an unnecessary tension between financial prudence and enjoying life. The two are not mutually exclusive! In our experience, in fact, those who spend all or more than they earn in an effort to make themselves happier sadly find that the internal peace and contentment they so long for has somehow passed them by.
We believe an appropriate balance should be struck between funding long-term goals and enjoying the here and now. Unfortunately, however, the “live now” mentality seems to be back in full force and will almost surely add to imbalances that will need to be corrected during and following the next recession.
Author David Houle, CFA is a founding member of Season Investments. He serves as the firm's Chief Compliance Officer as well as sitting on the investment committee overseeing the management of client assets. David spent nearly ten years in various roles primarily managing individual client assets prior to co-founding Season Investments. David graduated with a degree in Finance from Colorado University in Colorado Springs in 2003 and earned the Chartered Financial Analyst (CFA) designation in 2006. David and his wife Mandy have three children and spend most of their free time with friends and family.
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