Consumer spending is unlikely to lead the economy out of the current recession.
The first chart in this post shows the personal saving rate—the ratio of personal saving to disposable personal income—from the first quarter of 1952 to the second quarter of this year, as calculated by the Department of Commerce’s Bureau of Economic Analysis (BEA). During the 1950s and 1960s the saving rate averaged a bit more than 8 percent and fluctuated in a band roughly from 6.5 percent to 9.5 percent. From 1970 to 1985 the average was 9.8 percent and the band was wider, from 7.9 percent to 12.5 percent. In 1985, the saving rate began a long downward trend. In 2005 and 2008, it touched lows of 1.2 percent. During the current recession, the saving rate has increased dramatically, reaching 5.0 percent for the second quarter of 2009. Still the rate remains low by historical standards.
The second chart shows the ratio of household net worth to disposable personal income, quarterly, from the first quarter of 1952 to the first quarter of 2009. Household net worth is calculated quarterly by the Federal Reserve, while disposable personal income (personal income minus current taxes) is from BEA. From 1952 to 1996 household net worth fluctuated in a range between 4.0-times to 5.1-times disposable personal income. The spike in household net worth from 1996 to 2000 reflects the dot-com bubble. In the first quarter of 2000, household net worth reached 6.2-times disposable personal income. The bursting of that bubble dropped household net worth down to 5.0-times disposable personal income by the third quarter of 2002. From that level household net worth spiked up again, driven by house prices and rebounding stock prices, reaching 6.4 times disposable personal income during the second quarter of 2007. With the housing and stock market collapses, household net worth had fallen back to 4.7 times disposable personal income by the first quarter of this year.
Visual inspection of these two charts suggests an inverse relationship between household net worth and saving. It makes sense that there would be such a negative relationship: Saving is the activity through which households add to net worth: the greater the net worth, the less the need to save.
The next chart combines the data from the first two charts. The ratio of household net worth to disposable personal income is measured along the horizontal axis, and the saving rate is measured along the vertical axis. Each of the 225 quarters from the first quarter of 1952 to the first quarter of 2009 is represented by a point. There is a clear negative relationship between net worth and saving, as is demonstrated by the trend line drawn through the data points.
Based on data from 1992 and prior years, the normal range of saving rate for the first quarter 2009 value of household net worth appears to be 7 to 9 percent. It thus seems likely that the saving rate will be heading up from the current level.
Higher saving by households directly translates into lower retail sales. Because Washington State’s tax system is so heavily reliant on the sales tax, revenue growth is likely to be weak as the economy emerges from the recession.