US economy and stock market at high risk due savings as a percentage of disposable income remaining elevated

by Keven Young

During the month of July 2020, the savings rate as a percentage of disposable income was 17.8%. For the seven months ended July 31st, 2020, savings rates averaged 17.7% (harmonic mean of 13.7% & geometric mean of 15.6%). This compares to the 7.5% average for 2019.  US accounting firm Deloitte on September 15th, 2020 had forecasted a savings to disposable income rate of 18.7% for 2020.

Savings as a percentage of disposable income is released monthly by the US Commerce Department’s Bureau of Economic Analysis (BEA). The savings rate is so important for investors to monitor because it is virtually the inverse of consumer spending. The higher the savings as a percentage of disposable income, the lower the consumer spending is as a percentage of GDP. In 2019, personal consumer expenditures were about 68% of GDP. Therefore, it is important for investors to monitor the potential short falls of metrics that comprise such a large portion of GDP.

Once the COVID-19 pandemic resulted in U.S. state governors’ deciding to implement stay-at-home orders, the savings rate as a percentage of disable income increased to 12.9% in March, then a high of 33.7% in April. May, June and July’s savings rates were 24.6%, 19.2% and 17.8% respectively. For Deloitte’s economic forecast to be accurate, the savings rate for the five months left in 2020 would have to average 20% per month to stay on track with their estimate of savings being 18.7% of disposable income.

The above 14% rate coincided with a 41% decline in the Dow Jones Industrial Average from when the recession began to its December 1974 low.

For more on the consumer spending issue read Aug 27th, 2020 article “Probability of V-shape Recovery Low, Depression High”. In conclusion, it would be smart to continue to monitor the savings rate as a percentage of disposable income because of its impact on financial markets and economic growth.