Consumers are becoming more frugal and that may turn out to be a good thing.
One cause of The Great Recession was the cumulative effect of consumers spending more money than they could afford. Eventually, they got tapped out, business slowed down, and massive layoffs ensued. Of course, simple math says you cannot indefinitely spend what you do not have and, by 2008, the math caught up with many Americans.
Last week, the Commerce Department said the personal savings rate (saving as a percentage of disposable personal income) rose to 6.2% in the second quarter. That’s up from 5.5% in the first quarter. In the heyday of conspicuous consumption back in 2007, the savings rate was a paltry 2.1%, according to CNNMoney.com.
Higher savings is a double-edged sword. On the positive side, it means consumers are acting more responsibly and, by beefing up savings, they are setting the stage for future sustainable economic growth. The downside to this thriftiness is slower economic growth in the short term.
It’s a fine balance between saving enough to get our personal balance sheet back in order, but not too much that the economy takes years to regain its footing. Remember, consumer spending still accounts for about 70% of economic activity, according to The Wall Street Journal. The trick is we still have to shop -- but just not till we drop!
DOUBLE DIP IS NOT JUST FOR ICE CREAM CONES. Over the past few months, concern has grown that the U.S. economy could experience a double-dip recession. Drooping bond yields, which may suggest slower economic growth, coupled with some soft economic data and weak consumer sentiment, have raised a red flag. However, from an international perspective, the International Monetary Fund has raised its 2010 world economic growth projection five times since April 2009 and it now stands at a forecasted rate of 4.6% -- which is rather healthy and certainly not double-dip territory.
Although the likelihood of a double-dip recession still seems small, a July 27 Financial Times article outlined four risks that could possibly derail the recovery:
1. A decline in business and consumer confidence.
2. An end to temporary boost to post-recession economies, e.g., economic growth emanating from inventory re-stocking.
3. A new crisis or “black swan” event that throws the world for a loop.
4. Overly austere government budgets that tighten too much too soon and snuff out the recovery before it gets a chance to become self-sustaining.
These risks are reasonable and bear watching. However, let’s face it. No matter how well the world is humming, we (advisors) can always find something to worry about. But, that’s our job. It’s not that we’re pessimists. It just comes with the territory. We worry about things -- large and small -- in an effort to be proactive and to try and help you stay ahead of the curve.
Weekly Focus – Think About It
Here’s a list of the happiest countries in the world, according to a recently released Gallup Poll based on data collected between 2005 and 2009. Survey participants were asked to rate their overall satisfaction with their lives and how they had felt the previous day (to gauge their happiness in daily activities).
Rating Country
1 Denmark
2 Finland
3 Norway
4 Sweden
5 Netherlands
14 United States
17 United Kingdom
44 France
81 Japan
125 China
Does this list surprise you?
Best regards,
Kevin Kroskey
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