When Congress and the Obama administration let a 2% payroll tax cut expire on January 1 as part of the fiscal cliff deal, economists predicted a consumer retreat, [but such has not been the case – at all. It seems that] soaring housing and stock market prices are likely putting Americans in the mood for spending – but where’s the money coming from?
So writes Erica Alini in edited excerpts from her original article* posted at www.canadianbusiness.com entitled Americans are spending, but where’s the money coming from?.
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Alini goes on to say in further edited excerpts:
2% might not sound like much, but it does put a dent in people’s disposable incomes: For the average American household earning $50,000 a year, it means $1,000 less in spending money. Consumers, analysts said, surely were about to scale back on their trips to the mall, ignore the Amazon ads in their inbox and opt for home-brewed coffee over a Grande Latte.
Well, in January real personal consumption expenditures grew at the same pace as they had in December. In February they edged up a notch. In March they kept up the pace and by the end of the first quarter they’d risen by 3.2 per cent: well above expectations.
Could it be that people hadn’t noticed their paycheques were a few dollars lighter, analysts wondered? Perhaps the tax hike had caught families off-guard and they would need some time to adjust to their new, tighter budgets. “The reduction in personal income as a result of higher taxes … will likely slow consumer spending growth in the second quarter,” TD senior economist James Marple predicted in a research note when first-quarter results came out.
A month and a half into the second quarter, though, there aren’t many signs of that. Consumer spending data for April isn’t out yet, but growth in retail sales for the same month seems to indicate shoppers didn’t back down.
Where’s the money coming from?
1. Not from paycheques.
According to the latest jobs report, average hourly earnings are up 1.9% compared to April of last year, which amounts to 45 cents. In general, as the chart below shows, American incomes have been growing at slower and slower rates since the 1970s:
2. Not from increased borrowing.
According to the Fed, the extra cash isn’t coming from stepped-up borrowing either. Americans are still paying off their debts. Over the first quarter, overall U.S. household debt shrunk by 1%, to the lowest level since 2006:
3. It’s coming from savings.
This only leaves—you got it—savings. In January, households’ savings rate tumbled to 2.3%, down from 6.5% in December and 4.1% in November. It hasn’t climbed back up since. In March, the latest available reading, it stood at 2.7%, the lowest it’s been (excluding January) since December 2007:
Current savings rate too low to cope with even a moderate economic downturn!
Even if Americans keep paying off their debt, such a low savings rate is problematic. If it persists, too many U.S. families will have too small a cushion to be able to cope with even a moderate economic downturn, which, given the state of the global economy, could happen sooner than many expect. Even if Americans go back to living paycheque-to-paycheque, there’s only so much they can spend without relying on credit card debt and home-equity lines of credit.
In the absence of loose credit, consumer spending in the U.S. will be pegged to incomes—and there doesn’t seem to be much growth potential there.
(Editor’s Note: The author’s views and conclusions in the above article are unaltered and no personal comments have been included to maintain the integrity of the original post. Furthermore, the views, conclusions and any recommendations offered in this article are not to be construed as an endorsement of such by the editor.)
April 29, 2013 1 Comment
In the third quarter 2007 the American consumer was way out of shape when it came to the percentage of debt payments to disposable income, hitting a 30-year high at 14%… Today the ratio is nearing 30-year lows! Could this be good news for the markets??? Read More »
The economy is slowly hobbling back to health but for many Americans the rainy day fund is still looking a little dry, the credit card bill is still looking a little scary [Unfortunately, the liklihood is that,] as the economy strengthens further, many Americans will…spend their new found extra cash rather than save it. Words: 474 Read More »
More than 25% of American workers (33% of those in their 40s) with 401(k) and other retirement savings accounts use them to pay current expenses, new data show, [which is] undermining already shaky retirement security for millions of Americans. With federal policymakers eyeing cuts to Social Security benefits and Medicare to rein in soaring federal deficits, and traditional pensions in a long decline, retirement savings experts say the drain from the accounts has dire implications for future retirees. Words: 890
Look, if you’re absolutely stuck right now, then you’ve got to do what’s necessary but, in my opinion, you should avoid 401(k) hardship withdrawals at all costs … and think long and hard before you consider borrowing against your future retirement. With so many people nearing retirement already grossly underfunded [such actions are] going to prove catastrophic down the line. Words: 1043
A life insurance policy is intended to provide your family with a sizable amount of money should you meet an untimely death and, as such, can be said to be a something of a an ultimate bonanza – a pot of gold, if you will. Most people, however, think the only way to get money from a life insurance policy is to die but there is another way should your circumstances change and that is called a life settlement. In this article I provide you with some insider insights on how to go about negotiating the maximize payout on such a settlement. Words: 851
Many Americans are reacting to the economic downturn not by resolving to save more but by no longer actively planning for retirement. “That’s exactly the opposite of what they should be doing,’’ said Paul Ballew, senior vice president at Nationwide Insurance. Words: 369
Visit wsj.com – HERE – to find their calculator which shows where your household income stands compared to others in the U.S.. $506,000 puts you in the top 1%; the much talked about $250,00 in the top 6%; $200,000 in the top 10% while an annual salary of $43,000 puts you in the top/bottom 50%. Where do you stand?