Savings Rate Increases to 14-year High of 5.7% in April 2009

The US Savings Rate increased to 5.7% of disposable income in April 2009 and economists expect it to go to a post WWII high. That means less demand for goods and services, less growth, and lower stock prices.

In an article in the NY Times, economist David A. Rosenberg, the chief economist and strategist of Gluskin Sheff, a money management firm based in Toronto said "“People’s attitudes toward credit and home ownership are undergoing a fundamental shift." He expects the savings rate to rise above 14.6%, the post WWII record set in 1975. For reference, the savings rate over the last couple of years has been in the 1-2% range and even turned negative before the economic collapse. That meant Americans were spending more than their income. The result was vast amounts of debt.

So what does this mean if true? It means that the V shaped economic rebound that the pundits are calling for on CNBC and Bloomberg will have a hard time materializing. Consumers are repairing their personal balance sheets and socking money away, not buying cars, second homes, and taking exotic vacations. The era of conspicious consumption is over.

Don't expect the stock market to get above 10,000. Earnings for many companies will be poor and will remain poor.

It also means that banks will be flush with consumer deposits, potentially lowering the rates given on deposit accounts. When the economic crisis began, I speculated that rates on savings accounts and certificates of deposit should go up. With the end of off-balance-sheet financing, collateralization, and other forms of raising cash, banks would need to turn to deposits, making them more valuable. What I didn't foresee is that consumers would also turn to banks as a safe place to stash their burgeoning savings.

What remains to be seen is whether consumers will succumb to the allure of the stock market and reenter the casino, or continue to keep their money in "safe" investments like bank cds and treasury securities.

Whatever the outcome, saving money is back.