Savings Are Good, But May Slow Recovery

Mark Gongloff recently reported in the Wall Street Journal an interesting piece which may affect the long-term valuation models of many real estate investors. In our discounted cash flow models, we must assume a certain stabilized growth rate and over the recent years, those growth rates were likely higher than we expect to see going forward, according to Gongloff. The article references a recent San Francisco Fed Paper which predicts as much as a 75bps drop in consumption growth each year due to increased savings rates. The latest personal-income and personal-spending data is reported at the BEA website. Below are some highlights of the article:

• Strength of the recovery dependent upon savings accounts


• Combination of falling incomes and higher spending means consumers' savings will likely fall after surging to 6.9% in May


• Long-term path for savings is inevitably higher


• Ratio of household net worth to disposable income is at its lowest level since 1992


• Current net-worth figures are consistent historically with savings rates of between 6% and 10%


• If savings merely rise to the low end of that range, $700 billion in consumer income could be removed from GDP next year


• A 10% savings rate between now and 2018 would shave three-quarters of a percentage point from consumption growth each year


• High savings rates could spur demand for Treasury bonds and short-term corporate debt, keeping interest rates low