May 29, 2019
It is not surprising that savings have rebounded since the debt-fueled 2000s. Many households, once burned by excessive borrowing, have retrenched and are no longer living on the proverbial edge. Saving more may be a good thing for individual families, but it is not always so for the general economy. We all understand that savings, in general, are good, so let us focus on why the global economy needs the American consumer to spend rather than save.
Let’s start with the expenditure model of calculating gross domestic product:
GDP = Consumption + Government Expenditure + Investment + Net Exports
Globally, net exports zero out, and investment refers to businesses building machinery, buying plants, etc., not investing in the stock market. If one assumes that companies do not invest without demand, the two key determinants of economic growth are therefore consumption and government expenditures. In the US, government spending is about one-third of the size of consumer spending and is offset largely by tax revenue, which mutes its economic impact. This allows us to focus just on consumption as a core driver of economic growth.
The last memory of Eco 101 that we will dredge up is that there are only two choices of what to do with your money – you can either spend it or save it. As illustrated above, Americans save about $0.07 for every dollar earned. Globally, savings rates are above 25%, with the world’s second largest economy, China, experiencing personal savings rates above 47%.This global savings glut is both culturally and economically driven, meaning that it is unlikely to change quickly. The growing middle class in China should help mitigate its bloated savings rate over time; however, this is a generational issue, meaning that the American consumer is likely needed to drive economic growth for the foreseeable future.
To give you a sense of the impact our domestic consumers have on the world, consider that a 1% decrease in the savings rate would increase spending by almost $150 billion per year, increasing our own GDP by 0.7% and global growth by 0.2%, not to mention the knock-on effects coming from increased corporate expenditures. In a low growth environment, these numbers are significant.
We are not advocating for you to max out your credit card, but we do think that the impact the consumer has on economic growth is an important indicator for investors to track.
We hope you had a wonderful Memorial Day, and we extend our thanks to all of you who are currently serving or have served our country in the past.
 As measured by the Bureau of Economic Analysis.
 World Bank Group data as of 2017.
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