Why Consumers Will Save Even More

05/17/2010 11:02 am EST


Gary Shilling

Columnist, Forbes

Gary Shilling, editor of INSIGHT, says US consumers can no longer count on rising stock prices and home values and will be forced to save more over the coming years.

We’ve argued that US consumers are shifting from a quarter-century borrowing-and-spending binge to a decade-long saving spree.

Americans have been trained by the media, by retailers, even by the government to spend now and pay later, much later. Instant gratification was the goal. As a result, the personal saving rate fell from 12% in the early 1980s to 1% before the recent rebound.

The flip side of saving less was borrowing more, and total borrowing with residential mortgages, home equity loans, credit card and auto loans, student loans, etc., in relation to disposable personal (after-tax) income leaped from 60% in the early 1980s to 130% before receding recently.

Less saving and more borrowing propelled consumer spending as a share of [gross domestic product] from its 62% norm to 71%. In the 1980s and 1990s, the US stock market was on a tear. The unwinding of inflation pushed interest rates down, [which was] instrumental in propelling the [Standard & Poor’s 500 index’s] P/E from 7.9x in July 1982 to 28.26x in August 2000.

Investors didn’t withdraw appreciable money by selling stocks, but they did become convinced that their ever-rising equity portfolios would easily finance early retirement, their kids’ college educations, and a few round-the-world trips in between. After all, with the S&P 500 rising over 20% annually for five consecutive years, 1995-1999, why wouldn’t it continue indefinitely?

Stocks, however, peaked in early 2000 as the Internet bubble burst and then fell 78% in the case of the Nasdaq Composite index. [But] investors reasoned that they deserved 20%-plus returns each and every year, and if stocks no longer did the job, other investment categories would.

So, they switched to commodities, foreign currencies, emerging market stocks and bonds, hedge funds, private equity and, especially, residential real estate.

Stocks did revive, but after barely exceeding their early 2000 tops, they fell 57%. Those two declines of over 40% each were half the four such drops since 1900 and unnerved individual investors. Their stock portfolios on average had gone nowhere in the 2000s.

So, even though equities rebounded 23% in 2009, shareholders no longer trust [stocks] to take care of future financial needs and substitute for saving from wages and salaries, dividends, rents, interest, and other current income. Indeed, in 2009, investors put $375 billion into bond mutual funds but withdrew $53 billion from US equity funds.

We believe, then, that the case for a chronic rise in the US household saving rate over the next decade is robust. We continue to forecast an average 1% annual rise in the saving rate, so it will be back into double digits in the next decade. But, just as the decline in the saving rate over the last quarter-century was not a smooth trend, the increase is also likely to be choppy, as has been the rise so far.

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