Savings rate improvement may be an illusion

In June I wrote: "In recent months, savings rates have headed higher. Borrowing is sharply lower. We're seeing a gradual return to the 'old-fashioned' wealth-building techniques of the past."

Jon Markman says "not so fast":

Analysts at TrimTabs Research reported last week that the government's Bureau of Economic Analysis is painting a wildly inaccurate picture of the health of U.S. consumers. The statistics agency reported that personal savings as a percentage of personal disposable income was a stunning 6.9% in May, the highest since December 1993. That's about 7 percentage points above the rate of 2008, and it suggested a new era of frugality.

Ha - you knew that couldn't be right. TrimTabs' analysis, which is based on real-time income tax deposits rather than mathematical models, suggests that the real savings rate is a lousy 0.9%, not 6.9%. ... It shows that consumers are in much worse shape than government statistics suggest and therefore have little money available to make house payments or pay for yoga gear bought on credit.

How did the government get it wrong? According to TrimTabs, two temporary factors lifted the savings rate: Social Security recipients got one-time payments of $250 in May as part of the stimulus package, while another huge chunk of money went to welfare recipients. Strip out those anomalies, and the savings rate drops to 4.8%. Meanwhile, TrimTabs' analysis of daily Treasury Department data suggests that the government models - which are based on lagging Quarterly Census of Employment and Wages data from last year and thus have not been updated to reflect the true impact of the recession - greatly overestimate wages, salaries and dividend income. Using live data and backing out one-time payments, the analysts conclude the real savings rate is less than 1%.

To be more specific, using its outdated model, the Bureau of Economic Analysis reported in May that personal income had risen 0.3% year over year despite the worst recession and employment crash in 70 years. That's craziness.

TrimTabs' model, using real-time data, shows that personal income fell 3.6% year over year in May while salaries and wages sank 4.8%. That's much more believable. The bureau won't catch up to what's really happening in the economy until its data is updated through the first quarter of this year, and then it'll likely show a big drop.

Apparently I should have emphasized the word "gradual" by writing it in bolded, 20-point font.

The shift in consumer behavior is happening (even 1% savings is better than the negative numbers the U.S. has run in recent years), but not surprisingly, it's taking some time to change deeply entrenched behaviors. The real question is whether any of these behavioral changes will last once the economy finally improves, or whether people will revert immediately to past bad habits. I suppose that will partly depend on how long the pain lasts.
____________________________________________________________________________________

Mark Biller is Sound Mind Investing's Executive Editor. Visit www.soundmindinvesting.com to learn more.