Thanks Jeff for a very cogent post ..
A news time that needs some analysis...
<<American consumers went on a buying binge in July, ratcheting up spending twice as fast as their incomes grew. That drove down the nation's personal savings rate to the lowest point ever recorded.
After spending cautiously during the spring, consumers splurged last month, increasing their spending by a brisk 0.6 percent, the biggest jump since February, the Commerce Department reported Monday.
Spending rose a little bit faster than the 0.5 percent gain many analysts were anticipating.
Americans' incomes, which includes wages, interest and government benefits, meanwhile, grew by a modest 0.3 percent in July, matching analysts' expectations.
Economists said people are feeling wealthy and in the mood to spend because jobs are plentiful, incomes are rising, inflation is low and the stock market _ which was volatile in the spring and helped to temper spending _ is buoyant.
``The consumer is back,'' declared Joel Naroff, economist with Naroff Economic Advisors. ``It was not just motor vehicles and furniture that people bought. They traveled, ate out and bought all the little things they wanted.''
All that spending pulled down the personal savings rate _ savings as a percentage of after-tax income _ to a negative 0.2 percent in July, the lowest monthly rate ever. In June, the rate stood at a positive 0.1 percent.
Still, the savings rate isn't as dire as it would seem, economists said. The savings rate measures only the amount of money being put aside each month for savings.
It doesn't represent a calculation of personal wealth, which would account for gains households have realized on their savings in previous months from such things as rising stock market values and higher real estate values. Thus, the savings rate reflects money socked into a 401(k) but it doesn't capture an increase or decrease in its value.
The rising value of investments with the buoyant stock market has contributed to the low national savings rate because consumers feel more confident that they can afford to save less and spend more because their investments are doing well, economists said.
On Wall Street, the Dow Jones industrial average closed up 60.21 points at 11,252.84, a possible sign that investors are more confident about the future direction of stock prices after several indecisive sessions.
Even though consumers, a main force behind economic growth, opened the third quarter by going out on a spending spree, many economists continue to believe that the economy slowed in the current quarter to an annual rate of around 3.5 percent to 4 percent, compared with the 5.3 percent rate in the second quarter.
``Overall, I think consumers have reined in their most aggressive spending as seen last year but they remain sturdy contributors to the economy,'' said Mark Zandi, economist with Economy.com.
Last week, the government reported that consumer spending, which accounts for two-thirds of all economic activity, moderated in the April-June quarter, rising at a 2.9 percent annual rate, the slowest pace in three years.
The Federal Reserve has boosted interest rates six times over the last 14 months to slow economic growth and stave off inflation. The Fed's rate increases are designed to make borrowing more expensive and cool demand for such big-ticket items as cars and homes.
The Fed, after meeting last week, decided not to raise interest rates for a seventh time, but held the door open to possible action in the future, citing concerns that the tight labor market could spark wage and price inflation down the road.
In July, spending on durable goods _ cars and other costly manufactured goods expected to last at least three years _ sprinted ahead by 0.8 percent. That followed a 0.1 percent drop in June.
Spending on nondurable goods, such as food and fuel, grew by a solid 0.5 percent last month, reflecting in part higher energy prices, economists said. That was down from a 0.7 percent increase in June.
Americans' wages also grew by a solid 0.5 percent in July, compared with a 0.6 percent gain the month before.
Economists said last month's 0.3 percent increase in all income was dampened by smaller wage gains for government workers, largely reflecting the departure of temporary census workers.
In June, Americans' incomes and their spending grew by 0.4 percent each. >>
On savings and spending I thought this news above is very relevant, yesterday in my post to PMG I lamented about low saving rates 'paradox' that some think is a problem, in this set of news you would realise that 'low saving'some economist worry about is actually a great thing if existing savings are growing.
The economic problems in Japan are basically due to the fact that the Japanese do not spend, they think that falling prices would let them have the 'same goods cheaper' in a years time, it is this lack of spending that destroys economy. Huge saving rates may lead to higher national wealth accumulated. However, the flip side is that this higher wealth can create 'zero' interest rate situation like in Japan and economist may suggest injecting 'inflation' in the system to ignite demand. Distributing free shopping coupons to encourage demand and massive state spending schemes encroach into foundations 'national economies'as fiscal defecits yawns and state relies on increase in taxes to reduce defecits. Yhe ideal spending is the spending that is created by individuals according to their tastes and productivity factors.
For me lower saving rates and higher spending are further signs of an economy where people use slow and steady accumulated wealth to buy 'satisfaction and needs' it is failure of Japan to reach this ideal situation that led to huge break of the confidence in the markets and economy at large, although a very rich country with huge trade surplus it is still languishing and caught in a serious recession.. |
