Reminder: Higher US Savings is a Good Thing

Today I can see a few headlines telling me that markets are down due to the US savings rate hitting its highest level in fifteen years. And beyond the usual we-need-to-attribute-every-market-movement-to-something problem with financial media (do we really know markets fell/rose/were mixed because of the one piece of news highlighted as the cause), I've actually come across a few different places where the jump in US savings is being reported as a negative piece of news.

U.S. stocks fell, giving the Standard & Poor’s 500 Index the first two-week decline since March, after the highest American savings rate in 15 years spurred concern that consumer spending will slow... “The magnitude of that savings rate may have gotten some folks by surprise,” said Philip Orlando, who helps manage $409 billion as chief equity market strategist at Federated Investors Inc. in New York. Economic and earnings growth is “potentially not going to be as robust as some were thinking. That’s weighing on stocks.”

And another:

Stocks ended mixed today after the Commerce Department reported that personal spending, incomes and savings all rose in May. What troubled investors was that the savings rate soared to 6.9 percent, a 15-year high, while spending rose by a more modest 0.3 percent. The trend suggests consumers are being extremely careful with their money. That’s good for the individual, but not great for the overall economy in the short-term.

Have some people forgotten that savings is actually a good thing? (US government included) When people speak of higher savings and lower spending in a negative light, because it means less demand in the near term, they forget a key point: higher savings implies smarter spending decisions today and fuel for more spending tomorrow.

Spending in general doesn't sustainably grow an economy, smart spending does. It is unfortunate that many people have conflated wasteful spending with smart spending into a single broad concept of spending in general. While it is surely hard to differentiate smart spending from wasteful spending, especially in the many gray areas of modern life, (Is buying an iPhone smart or wasteful... depends on what effect it has on the buyer and how they use it), at the very least we should be aware that there are two major kinds of spending. The kind where you spend $1 and get less than a dollar in value back (wasteful), and the kind where you spend $1 and get more than a $1 back (smart). I'm not adding cost of capital to my $1 example for the sake of simplicity. Americans, the US government, and US corporations made a lot of $1 outlays in recent years which ultimately (even if not initially) resulted in less than a dollar back. We can do with less of this.

Given that savings actually implies a more rigorous analysis of spending by the consumer, one would imagine that the ratio of smart spending to wasteful spending is likely to increase. Theoretically, if everyone could somehow cut out all of their wasteful spending, but maintain their smart spending, they could increase their savings rate while destroying less value (less $1 outlays getting less than $1 in return). In this sense, no rational person should shun higher savings, especially after the US is coming off of a spending binge. If the US suffered from years of high savings rates one could argue that people are missing out on smart spending decisions, but given we've come off of a binge, the most likely casualty of lower US consumer spending (or higher savings) is wasteful spending.

So just a reminder: coming off of a spending binge, higher savings means that the US consumer is using their capital more efficiently and is setting the stage for future, smarter spending, which is a positive. Also, markets doubtfully rose/fell/weremixed because of this one data point cherry picked by a journalist.