Amid declining employment, work week and hourly earnings and faced with a record debt level, the US consumer was hard pressed to maintain the right balance between spending and saving in order to help sustain the economy while restoring its balance sheet through higher savings. Recent data show that Americans did just that.
Wages and Salaries remain very weak but the apparent improvement in the labor market raises hopes that labor income will soon start rising at a faster pace.
Government safety nets like Transfer Payments and lower income taxes have played their role during the downturn but need to be relieved by rising labor income.
Thanks to the significant government transfers and lower income taxes, PDI has been rising steadily throughout 2009.
The rise in PDI enabled Americans to triple their savings without curbing consumption. In fact, November PCE exceed their June 2008 record level.
This is a pretty remarkable achievement! Here is the math between August 2008 and November 2009:
| Aug-08 | Nov-09 | Change | ||
| Wage and Salary | 6580.0 | 6363.6 | -216.4 | |
| Transfer Receipts | 1873.7 | 2169.4 | 295.7 | |
| Current Taxes | 1489.4 | 1064.3 | -425.1 | |
| PDI | 10809.0 | 11135.4 | 326.4 | |
| Savings | 184.4 | 525.1 | 340.7 | |
| PCE | 10232.1 | 10244.2 | 12.1 | |
Wages and Salaries dropped $216B in 15 months, or 3.3%, but higher transfer receipts and lower income taxes totaling $720B enabled Personal Disposable Income to rise by $326B, or 3.0%, during the most severe economic contraction since the Depression.
Americans maintained their expenditures and saved the remaining $340B. Is this the “new normal”, the era of frugality expected by many observers? These numbers suggest not. Americans are not ready nor willing to reduce their standard of living, as long as Congress obliges.
What about 2010?
Employment is the key. The good scenario is that employment levels begin to rise as the bailout money dries up. Savings rates stay around the 2009 average of 4.6%. Higher income taxes, inevitable to pay the 2009 bailouts, are delayed to 2011, enabling PDI and PCE to rise 2.5-3.5% with little inflation.
The bad scenario is… very bad. Employment does not pick up and the bond vigilantes force rates up forcing Congress to focus on the deficit. Higher taxes are announced for 2011 and beyond and consumers increase their savings rate beyond 5.0%. The Fed can’t do much more.
Related posts:
- THE US CONSUMER: SAVINGS? WHAT SAVINGS?
- THE US CONSUMER: ANYTHING WRONG?
- U.S. CONSUMERS DELEVERAGING FAST
- Wealthy Reduce Buying in a Blow to the Recovery
- US Consumer Spending Accelerates, Savings Decline
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