Wednesday, August 05, 2009

Investing Implications of Higher Savings Rate

Quite a bit is being made about the recent increase in the consumer savings rate and its impact on overall economic growth going forward. Historically, the consumer accounts for 70% of GDP. This increased savings mentality could go on for several years; thus, changing how consumers spend discretionary income dollars.

Baby boomers have seen their retirement nest egg shrink, first in the bursting of the tech bubble early in this decade and secondly in the bursting of the real estate bubble. These two events alone have had a detrimental impact on investor balance sheets.

Jake, at EconomPic Data, graphically details the decline in per capita real personal consumption at the same time as the savings rate has spiked.

This increase in the savings rate has occurred at the same time that disposable personal income has declined.

And while disposable incomes have declined, the absolute dollar amount saved has actually increased.

Rebecca Wilder notes on her site, News N Economics, that this increased level of savings in a recession is an oddity. During the past six recessions leading up to this one, she notes the savings rate actually declined. The below chart shows, and Rebecca explains in more detail in her post, the oddities of this recession, the cumulative savings rate in this recession is actually increasing and now crossing the savings rate from the past six recessions. This higher level of savings maybe the new normal.

The potential implications of this higher savings rate for investors is consumers may spend their discretionary dollars in other places than at the high end if the savings rate remains at a higher level than the recent past.

So is it the Wal-Mart (WMT) or Family Dollar (FDO) type of stores that are the beneficiaries of future consumer dollars? In the restaurant space is it the McDonalds (MCD) of the world. In the consumer space, will companies need to have competitive price points to compete with private label store brands. Maybe the mid level retailers are the ones that get squeezed the most. Linens N Things is now just an online retailer and Gottschalks, Hartmarx, KB Toys, Eddie Bauer, Tumbleweed, Oceanaire and Circuit City have filed bankruptcy.

This is not to say consumers won't spend at the high end, they just are not likely to spend on the high end like they did before this recession began. For this to develop into a longer term trend, I think the economic recovery would need to be a very weak or jobless one. If economic growth turns out to be stronger than most project, consumers have short memories and could easily go back to their spendthrift ways.

Disclosure: Long interest in WMT, MCD

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