Showing posts with label Household savings. Show all posts
Showing posts with label Household savings. Show all posts

Saturday, April 28, 2018

28/4/18: The Great Recovery with No Savings: U.S. Households' Meet 'Exceptionalism'


Via @bySamRo, a chart from Deutsche Bank research:


Which, of course, illustrates the marvels of the current 'recovery' cycle - a steady rise in the proportion of U.S. households with no wealth. More than 30 percent of all U.S. households have zero or negative non-housing wealth.

To pair this with other data, here is the U.S. household saving rate:


And here are the median saving account levels by age:

Not scared yet? Ok, here's another fact: according to Bankrate's financial security index survey, released in January 2018, only 39 percent of Americans said they would be able to finance a $1,000 emergency spending using their savings. In 2016, a survey found that 69 percent of Americans had less than USD1,000 in savings, while 34 percent had zero savings.

A dental emergency, even with a dental insurance coverage, can knock a good half of 69 percent of the U.S. households into zero savings territory. Credit cards and personal loans are de facto shoring up the Great American Dream for the vast swathes of the middle classes. Some 'exceptionalism', folks...

Friday, February 9, 2018

9/2/18: Money Velocity and Signals of Households Leverage Risks


Fed has a problem, folks. Not a new one, but a very, very persistent one: velocity of money.

Here is the data:

What does this mean? The velocity of money is defined as the frequency at which a unit of currency is used to purchase domestically-produced goods and services within a given time period. As FRED database states, "it is the number of times one dollar is spent to buy goods and services per unit of time. If the velocity of money is increasing, then more transactions are occurring between individuals in an economy."

The Fed measures this parameter across three metrics:

  • M1, the narrowest component of money which covers currency in circulation (notes and coins, traveler’s checks, demand deposits, and checkable deposits. "A decreasing velocity of M1 might indicate fewer short- term consumption transactions are taking place. We can think of shorter- term transactions as consumption we might make on an everyday basis."
  • The broader M2 includes M1 plus saving deposits, certificates of deposit (less than $100,000), and money market deposits for individuals. Comparing the velocities of M1 and M2 provides some insight into how quickly the economy is spending and how quickly it is saving. When M2 is above M1, there are net savings being accumulated in the economy.
  • Per FRED: "MZM (money with zero maturity) is the broadest component and consists of the supply of financial assets redeemable at par on demand: notes and coins in circulation, traveler’s checks (non-bank issuers), demand deposits, other checkable deposits, savings deposits, and all money market funds. The velocity of MZM helps determine how often financial assets are switching hands within the economy."
So here is what we have as of 4Q 2017:
  • M1 velocity stands at 5.488, lowest reading since 1Q 1973 and 48.6 percent below pre-crisis highs. Which is in part probably reflective of the reduced importance of physical cash in our payments systems, but is also indicative of shrinkages across demand deposits money - the stuff we have in our bank accounts. Note: demand deposits capture electronic transactions, so changes in physical cash spending are offset by changes in electronic cash spending;
  • M2 velocity is now 26 quarters running below pre-crisis peak, down 35.1 percent on pre-crisis highs. The metric rose in the last quarter to 1.431 from 1.427 in 3Q 2017, but the levels are still below 1Q 2016. Which suggests that savings are weak.
  • Broadest money velocity is at 1.299, unchanged on 1Q 2016 and below pre-crisis highs for the 40th quarter running. The indicator is barely off historical lows of 1.295 achieved in 2Q 2017. MZM velocity is currently 63.4 percent below pre-crisis highs.
  • Finally, the gap between the M2 and M1 velocities (a measure of savings) is at negative 4.1 which indicates dis-saving in the economy.

Patently, there are no signs in this data of any positive Fed QE impact on households' balances or propensity to spend. Equally, there is no sign of a serious balancesheet recovery for the households. Yes, the rate of dissaving has fallen from M2-M1 velocity gap of 8.7 around 2007-2008 to current 4.1, but that still implies no deleveraging. Longer term U.S. households financial wellbeing remains under water, with only less liquid assets, such as property and financial investments underpinning household assets and no significant savings cushion held in liquid assets forms.

Equally patent is the fact that the traditional indicators of forward inflationary pressure (e.g. money velocity) are not quite in agreement with the measured inflation (which has exceeded the Fed target four months in a row now and has been beating analysts' expectations over the last three months). The only way the two figures can be reconciled is via increased debt levels on household balances sustaining consumption growth. Not a great sign for the future, folks.


Wednesday, April 24, 2013

24/4/2013: Systemic biases in income, consumption & savings surveys


A subtle, but important from policy and business strategy perspective paper from the Banca d'Italia, Working Paper No. 908, titled "Asking income and consumption questions in the same survey: what are the risks?" (April 2013) by Giulia Cifaldi and Andrea Neri.

The issue at hand is of relevance to:

  • Marketing and market surveyors who aim to identify the relationship between sub-groups or categories of consumers in terms of their incomes and consumption, as well as savings;
  • Policymakers concerned with use of surveys to accurately gauge savings and consumption (in the recent case in Ireland the issue relates to the accuracy of the estimates of required income expenditure and available disposable income in the case of Personal Insolvency Guidelines).

Per authors: "Sample surveys … focusing on income usually do collect some information on expenditure data. A main drawback of this practice is that it could let some researchers think that both sets of information have similar accuracy, as they are derived from the same survey. This paper provides an empirical investigation of the consequences of such an assumption.

We draw on the Survey of Household Income and Wealth (SHIW, thereafter) as a case study, since it collects information on both income and consumption. We combine this survey with the information coming from other surveys that are assumed to be more reliable than the SHIW for specific items."

Core findings:

  • On average, "the underestimation of household income is lower than the one relating to consumption."
  • "As a consequence, in the survey saving rates are likely to be overestimated," and  "…measurement error in income data is proportionally higher for high incomes."
  • In the case of consumption data: "Household saving is likely to be overestimated, especially for households in the low income classes."
  • Authors also "find evidence that measurement error may bias the relationship between household savings and its determinants."

Link to the study: http://www.bancaditalia.it/pubblicazioni/econo/temidi/td13/td908_13/en_td908/en_tema_908.pdf

Monday, January 14, 2013

14/1/2013: Irish Savings Rates - Q3 2012


Data for Irish Savings rates for Q3 2012 has been released by the CSO (see release here). Instead of rephrasing the release, lets take a look at the underlying data (link to data is provided on page 1 of the release).

First off: household savings and consumption expenditures, seasonally-adjusted:


Per chart above (all in current market prices, so no inflation adjustment, but seasonally-adjusted)

  • Disposable income rose in Q3 2012 to EUR23,002 million - up EUR486mln (+2.16%) q/q after expanding EUR385mln (+1.74%) in Q2 2012. This is good news. Year-on-year, income is up EUR1,158mln (+5.30%) and this follows up on EUR823mln increase y/y in Q2 2012 (+3.79%).
  • Historical comparatives for total disposable income are also looking good. Average income since Q1 2008 was EUR22,984mln, so we are close to that in the latest figures. We are also ahead 2010 average (EUR22,198mln), 2011 average (EUR21,693mln), but below 2008 average (EUR25,061mln) and 2009 average (EUR23,310mln).
  • Final consumption expenditure in Q3 2012 stood at EUR19,319mln up EUR64mln (+0.33%) q/q partially reversing decline of -EUR77mln (-0.40%) q/q in Q2 2012. Year-on-year, consumption spending was up EUR217mln in Q3 2012 (+1.14%) after posting a y/y decline of -EUR165mln (-0.85%) in Q2 2012.
  • In longer range averages terms, latest consumption reading is just about at the average level for 2012 (EUR19,302mln), slightly below 2011 average of EUR19,362, and below 2008 average (EUR22,264mln), 2009 average (EUR19,836mln) and 2010 average (EUR19,532mln).
  • Gross household savings stood at EUR3,684mln in Q3 2012, up EUR423mln (+12.97%) q/q and this follows EUR463mln rise (+16.55%) in Q2 2012. Year-on-year, household savings rose EUR942mln (+34.35%) in Q3 2012 after posting a EUR988mln (+43.47%) y/y rise in Q2 2012/
  • So far, Q1-Q3 2012 average savings run at EUR3,248mln - ahead of all annual averages, save for 2009 when they reached EUR3,475mln.

Saving ratios:
  • As the result of the above, the household savings ratio (ratio of gross savings to total disposable income) rose from 14.48% in Q2 2012 to 16.02% in Q3 2012. This represents an increase of 1.53ppt q/q (following a 1.84% rise q/q in Q2) and a y/y rise of 3.46ppt (down from the y/y rise of 4.00% in Q2 2012).
  • Longer-term comparatives suggest the return of strong precautionary savings motive (as shown in the chart below). More specifically, adjusting for growth variation in Irish GDP, longer-term savings ratio consistent with economic recovery for Ireland should be in the range of 8.6-11.9%. We are now well above that range. More significantly, even taking shorter period deleveraging pressures in 2008-present crisis, the savings ratio averages at around 14.10%, lower than the current 16.02%. 2012 average savings ratio through Q3 is 14.38% against 2008-2011 average of 11.9%. By all metrics, Q3 2012 looks like a return of the precautionary savings motive for households.


However attractive it might appear to make an argument that savings ratio is too high amongst Irish households, one must consider the fact that our households are:
  1. Under immense pressures to deleverage out of extremely high debt ratios (an objective consistent with banks stabilisation objective of the Government and with Troika concerns about debt levels, as well as with the goal of restarting household investment cycle)
  2. Household savings = banks deposits and I doubt there is out there a single Irish politician brave enough to suggest we need less of the latter
  3. Current act as the main driver for supporting gross national savings from complete and total collapse. Do recall that national savings = national (domestic) investment (ex-FDI). And do recall that in Ireland, SMEs are funded by domestic savings (at least equity, non-debt funding component). Which means that were we to have meaningful investment activity here, we need to encourage and support, not discourage and tax, savings.
On this note, let's take a look at seasonally unadjusted data for aggregate savings in the economy:



The chart above shows clearly that:
  • Total savings in the economy declined to EUR7,320mln in Q3 2012 (down EUR559mln or 7.09%) q/q, but rose EUR1,747mln (+31.35%) y/y. In Q2 2012 there was an annual rise of 28.71% or +EUR2,199mln.
  • Excluding financial corporations, the real economy's savings fell EUR452mln (-8.05%) q/q in Q3 2012, but a re currently up EUR1,851mln (+55.84%) y/y, against Q2 2012 annual rise of EUR910mln (+19.3%).
  • The chart above shows that once we exclude financial corporations, savings actually are running much closer to long-term trend and that the trend is moving up, toward rising savings once again. This upward trend was established around Q1-Q2 2011 and as we shall see shortly is not necessarily signalling a major departure from the long-term established trends (se chart below).
The decomposition of savings into sectors shows that:
  • Household savings rose modestly q/q in Q3 2012 (absent seasonal adjustment) and are up significantly y/y (+26.6% in Q3 2012), although that rise was well-matched by 26.0% increase in Q2 2012.
  • General Government continued to dis-save (accumulate debt) in Q3 2012, shrinking national savings by EUR2,331mln (more than 9 times the rate of dissaving, as the rate of saving in the households). Year on year, the Government has managed to post EUR423 increase in dissaving (+17.2%).
  • Financial Corporations also showed dis-saving in Q3 2012 or EUR107mln compared to Q2 2012 and EUR104mln (4.6%) compared to Q3 2011.
  • Non-Financial Corporations posted savings of EUR4,930mln in Q3 2012, up EUR1,606mln (+48.3%) on Q2 2012 and up EUR1,215mln (+32.7%) on Q3 2011. 
  • Thus, savings increase in Non-Financial Corporations outpaced savings increase amongst the Households by the factor of almost 6 in quarterly terms and by 1.2 in annual terms. If the Irish Government (and some analysts) are concerned with high savings rates, they are better off targeting companies accounts not household ones. But I doubt they are likely to start calling for a savings tax on MNCs.


Two charts below show long-term trends in savings components by sector. I reproduce two charts to show best-fit models and comparable models.



The charts above very clearly show that since about mid-2005, long term trend in Government savings diverged from those for Non-Financial Corporations and Households. Specifically, National savings became positively dependent on Households and real Companies and negatively impacted by the Government. In other words, current high Household savings rates are a saving grace for the economy that suffers from extreme pressures of Government deleveraging.

The third chart above clearly shows that Households contribution to total savings in the economy counter-moved with Government contributions, supporting the overall savings activity. In fact, correlation between Government savings and Household Savings averaged remarkable -0.91 in the period 2002-present and statistically-indistinguishable -0.89 since Q3 2006 through present. Over the same period of time, correlation between Government savings and Non-Financial Corporations savings runs at slightly lower -0.88 historically and -0.86 since Q3 2006.