Americans Have Money and Will Spend It, Goldman Sachs Says

The personal saving rate was revised up 3.3 percentage points, marking the largest revision on record
August 9, 2018 Updated: August 10, 2018

WASHINGTON—Americans have saved a lot more money than government statistics previously reported. The personal saving rate was actually almost twice as high in 2017, thanks mainly to higher-than-expected employee compensation and dividend income.

The U.S. government revised the personal saving rate—saving as a percentage of disposable personal income—sharply up from 3.4 percent to 6.7 percent in the second-quarter gross domestic product (GDP) report released on July 27.

“[The] revision to the personal saving rate was surprisingly large,” Goldman Sachs senior economist Daan Struyven wrote in a research note. “In fact, this revision to the saving rate over the prior six months is the largest on record.”

There are three main drivers of the upward revision to the saving rate, according to the Department of Commerce. First is a $189 billion revision to asset income, reflecting increases in dividend and interest income. Second is a $111 billion revision to nonfarm proprietors’ (single-owner business) income, showing higher estimates of underreported income based on new IRS data. And third is a $101 billion revision to wages and salaries.

That’s about $400 billion more in the pockets of Americans than previously projected, which helps to explain the strong consumer spending.

Strong consumer and business spending have pushed the U.S. economy to record highs recently. GDP surged 4.1 percent in the second quarter, its fastest pace since 2014. With a tight labor market, consumer spending is expected to contribute further to economic growth.

“In principle, a higher saving rate today should lead to faster consumption growth in the future because consumers have more money to spend,” Struyven wrote.

The second quarter GDP report was also positive for the government spending outlook, according to him.

“As a result of the consumption and federal spending upgrades, we nudge up our GDP growth forecasts and lower our unemployment rate projections,” he stated.

Based on the latest report, Goldman Sachs now expects 3.3 percent economic growth in the third quarter and 3.0 percent in the fourth quarter (versus 2.5 percent previously). The bank also expects the unemployment rate to further drop to 3.5 percent by the end of this year and to bottom out at 3.0 percent in 2020. The unemployment rate in July fell to 3.9 percent, the lowest since 2000.

If economic growth continues at this pace, the annual growth may top 3 percent in 2018 for the first time in 13 years.

It is more money going into consumers’ pockets and it is driven by a combination of things, said Lewis Walker, a financial planning and investment strategist at Capital Insight Group.

“The economy is doing better. [Americans] are earning the money, or they’re doing well with their investments to have the money to increase the savings rate,” Walker said.

“As long as the jobs statistics are good, the employment rate is high, and people are feeling good, they will continue to save,” he said, adding that tax cuts are contributing to personal savings as well.

Sharp Drop in Saving Rate

Between 1960 and 1980, the household saving rate in the United States was in the range of 10 to 13 percent. Since then, however, the saving rate dropped sharply. The average saving rate in the last decade was only 5.5 percent, according to Martin Feldstein, professor of economics at Harvard University and former chairman of President Ronald Reagan’s Council of Economic Advisers.

“[Americans] are starting to look at the realities of retirement and old age,” Walker said.

Particularly with increased longevity, baby boomers, who are currently between 54 and 74 years old, have reached a point where they think they have not saved enough, he explained.

Hence, there is motivation now to save more money. But, according to Walker, the interesting thing is that consumer spending has not slowed down due to more savings.

Consumer spending accounts for about 70 percent of U.S. economic activity and hence changes in consumer confidence are closely watched by economists.

In recent months, the Conference Board’s consumer confidence index, a gauge of household assessments about the economic situation reached its highest levels in 17 years.

“Consumers’ assessment of present-day conditions improved, suggesting that economic growth is still strong,” Lynn Franco, director of economic indicators at the Conference Board, stated in the board’s July report.

According to the survey, people who state business conditions are “good” increased, while those claiming business conditions are “bad” dropped. Consumers’ assessment of the labor market was also more favorable. Those saying jobs are “plentiful” also increased.

U.S. banks are also benefiting from strong consumer sentiment. JPMorgan CEO Jamie Dimon said in a statement that “the healthy U.S. consumer” helped drive double-digit growth in its credit card and money management businesses.

“We see good global economic growth, particularly in the United States, where consumer and business sentiment is high,” Dimon said.

Dimon often defends U.S. corporations’ use of their tax windfall in stock buybacks and dividends, moves that some have criticized as helping wealthier people rather than average consumers. Dimon told reporters in June that people who bashed buybacks were “basically ignorant.”

Boards of American companies may authorize a record $1 trillion in share buybacks this year, according to Goldman Sachs projections. This will mark a 46 percent rise compared to 2017. These share repurchases will help provide demand for stocks and raise their values, Walker said.

Average consumers also benefit from dividend distributions and share value increases, as they own stocks indirectly through their pension plans or mutual funds, according to Walker.

“People feel good when they see their 401(k)s going up. … It’s just psychologically they just feel better,” he said, adding that it boosts consumer confidence.

“The whole economy runs on confidence.”

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