The Savings Rate and The Two-Tiered Economy

In 1789, the US government, as we know it, was formed. George Washington became our first president and the Congress and Supreme Court had their initial sessions. That same year, government officials first began to collect financial data. Their methods had to be simplistic compared to today but it is fascinating to look at historical information from both governmental and private sources. One statistic that I also tend to zero in on is the savings rate in a nation. Historically, in the U.S., the rate tended to hover around 10% for the first 190 years of our our republic. According to economic historians, many people faced both employment and economic uncertainty so it was wise to always have something stashed away for a rainy day. If the figures were accurate, that might go a long way to explaining the great economic expansion that our nation had for several generations.

Starting in the mid-1960’s and into the 1970’s, the savings rate began to fall. People borrowed a lot more for homes and vehicles and the credit card became ubiquitous in many American households. With the exception of the 1974-1975 period when we faced inflation, recession and Nixon’s resignation, the savings rate never saw 10% again. By 2006-2007, some private estimates had the savings rate at zero! Think about that all of you who maximize your 401k’s each year. If your savings rate is 10-15%, a large number of people had to be maxing out their credit cards or lines of credit to get the average to come in around zero. When the Great Recession clobbered the economy in 2008-2009, the savings rate bounced back to 5-7%. Remember, this was when the unemployment rate jumped from 4.8-11.8% so many could not save at all.

As our slow expansion proceeded in recent years, new Federal Reserve figures peg the savings rate at 2.9%, the lowest official figure since 2007. At first blush, it sounds great in the sense that people are feeling confident, secure about their jobs and are spending more. Yet, other reports of late contradict that. Moody’s reports that 2.3% of automobiles are being repossessed. Also, some 3.6% of credit cards are past due without even a minimum payment. Most ominously, the Mortgage Bankers Association has reported that 9.4% of FHA loans are now in default which is a large jump from last quarter’s 7.94%. Bloomberg Business wrote that most of these defaulted home loans are NOT from Texas and Florida which suffered mightily from hurricane damage. When I first saw the FHA stats, I assumed the adverse weather was the culprit. Not so!

What is going on? As is often the case, to me it is simple demographics. Some 51% of US either own equities via 401K or other deferred compensation plan or have some form of private holdings. As the Dow Jones continues to break records, people feel wealthier and optimistic. At the same time, some 49% of Americans have no equity positions and are struggling to get by to a large degree. That is where the late payments, delinquencies and defaults are largely coming from these days.

Marketers need to be alert. Things may be great for you, your family and your friends. The rising tide has not lifted all boats. Depending on your business and target audience, things may not be nearly as stable as they appear.

If you would like to contact Don Cole directly, you may reach him at doncolemedia@gmail.com