What Does it Mean, Saving Rate drops to 12-Year Low when 50% of Americans Don’t Have Savings?

by Wolf Richter, Wolf Street:

Or what the averages are hiding.

We will start with income and see what’s left over, and for whom.

Personal income increased by 4.1% in December from a year earlier, the Bureau of Economic Analysis reported today. This includes all income received by all persons from all sources, such as from labor, financial assets (dividends and interest income but not capital gains), business activities, homeownership (rentals), government transfers, etc.

“Real” personal income — adjusted for inflation via “chained 2009 dollars” — rose only 2.37%. This is for the US overall.

Per-capita “real” personal income – which accounts for 0.71% population growth in 2017 and measures income per individual – rose only about 1.7%. If the inflation measure even slightly understates actual inflation as experienced by these individuals, their personal income growth might go away entirely.

Next step down…

Disposable personal income – personal income less personal taxes – increased 3.9% year over year in December. This is the income that folks have available for spending or saving. “Real” disposable personal income rose 2.1%. And on a per-capita basis, it rose only 1.4%. So these are not exactly huge increases.

Not everyone is getting this income growth equally.

The economy can be divided up into layers. Bridgewater Associates founder Ray Dalio sees a split between the top 40% of income earners for whom the economy is doing well, and the bottom 60% for whom the economy is a series of setbacks. Or by it could be 30% and 70%. Wherever the split is drawn, the smaller group of top income earners has had it good while the larger group of income earners at the bottom is struggling.

But consumers, no matter what their income levels, are trying to do their best to prop up the economy, upholding an American tradition. And they’re spending more, the Bureau of Economic Analysis reported today.

Personal consumption expenditures (PCE) – the goods and services purchased by everyone living in the US – rose 4.6% year-over-year. Adjusted for inflation, spending grew by 2.8%.

Personal outlays – PCE plus personal interest payments and personal transfer payments – rose 4.7% year-over-year.

So, with disposable income rising 3.9% (not adjusted for inflation), and with personal outlays jumping 4.7% (not adjusted for inflation), what’s left over and for whom?

The personal saving rate – disposable income less personal outlays – fell to 2.4%. This was even below the savings rate of 2.5% in November 2007, and the lowest savings rate since September 2005:

In terms of dollars, personal saving dropped to a Seasonally Adjusted Annual Rate of $351.6 billion, meaning that at this rate in December, personal savings for the whole year would amount to $351.6 billion. This is down from the range between $600 billion and $860 billion since the end of the Financial Crisis.

Read More @ WolfStreet.com