Economic Crisis

US & UK: Opposite data, same conclusion!

When an economy gets into trouble, do people save more or save less? Recent and opposite data in the US and UK has been used to arrive at the same conclusion about their economies. It’s a reminder that single data points should be treated with caution.

After Donald Trump was elected US president late last year a lot of people got excited. He was going to slash taxes and boost spending on infrastructure. The economy would boom and life would be good.

A little over half a year later and things don’t appear to be going to plan. Washington is bogged down in tribal, childish mudslinging over who once spoke to which Russian, or not. The mainstream media is increasingly (further) discredited. Meanwhile the president seems to spend more time on social media than attempting to run the country, or negotiate with others around the world.

After the election Trump supporters were optimistic. They got spending. Personal savings rates – which measure savings as a percentage of disposable income – went down sharply. Now, as doubts creep in, savings rates are going up again. This is clear from the following chart:

This had been interpreted to mean the economy is going to struggle. If Americans are saving more, then they’re spending less. And it’s all about consumption.

Meanwhile, on the other side of the Atlantic Ocean…

There’s plenty of political drama in the United Kingdom as well. In recent years the supposedly calm British have lurched from one political drama to another.

As of now the government, led by Prime Minister Theresa May, is hanging by a thread after a disastrous general election campaign. There’s talk of yet another challenge to the leadership of the Conservative Party, which could unseat May. Meanwhile there are loud calls from some for another general election.

Not to mention the need to negotiate the uncertain business of how the country will leave the European Union. A weak British government has to negotiate the country’s independence with representatives of 27 other countries. Talk about a bureaucratic bun fight…

In this environment, personal savings rates in the UK have just fallen off a cliff, as shown by the dark blue line in this chart:

In fact the UK personal savings rate, at just 1.7% of disposable income, is easily the lowest it’s been for more than five decades. This is widely accepted as evidence that the economy is in big trouble. It’s said that incomes aren’t rising enough relative to price inflation, and so people are saving less as they struggle to pay their bills.

Maybe the UK is in trouble, and the US too. But obviously there’s a contradiction here. The consumer spending heavy economies of both the US and UK are supposed to be at risk even though saving rates are rising in the former but falling in the latter.

This is a clear reminder that no one should ever rely too much on one single measure for insight. Life is full of nuance, especially when it comes to economies, finance and the world of investment.

Beware the commentator that confidently proclaims they know what’s going on based on one observation, however well it fits with received wisdom. We’re living through such unusual times that nothing can be taken for granted. Debts are high, interest rates and yields are ultra low (or negative), market intervention is massive, politics is volatile.

Anyway, since I’m on the subject of personal savings rates, let’s look at the longer term trends for both countries.

Here’s the US since 1959:

A couple of things to note. The long term trend has been firmly downwards since the early 1970s. People save less than their parents did.

Also the current personal savings rate is about the same level as between 2000 and 2004, before it plunged during the tail end of the real estate bubble. It then shot up after the global financial crisis as confidence plummeted.

Now let’s turn to the UK. Here’s a similar chart for that country, going back to the early ‘60s:

You can see straight away how dramatic the recent fall has been. But it’s also interesting that the overall history is very different to the US.

British savings rates were much lower than in the US in the early ‘60s, rose into the ‘70s, fell in the ‘80s, rose again in the early ‘90s, then fell back to levels similar to the US by around 2004. Then they jumped after the global financial crisis – just like in the US – settled back, and have now collapsed completely.

It’s not immediately obvious why the US and UK personal savings rates have followed such different trajectories over the past half century. Or why they’re diverging so fast right now.

I’ll have to give it some more thought. But in the meantime let me know if you’ve got any ideas at the email address below.

And remember: people can often use opposite data, in different places, to get the same conclusion. If you want to be a successful investor it’s important to stay sceptical, and make sure you’re looking at things with both a critical eye but also an open mind. That’s what we strive to do at OfWealth.

Stay tuned OfWealthers,

Rob Marstrand

robmarstrand@ofwealth.com


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Rob is the founder of OfWealth, a service that aims to explain to private investors, in simple terms, how to maximise their investment success in world markets. Before that he spent 15 years working for investment bank UBS, the world’s largest wealth manager and stock trader with headquarters in Switzerland. During that time he was based in London, Zurich and Hong Kong and worked in many countries, especially throughout Asia. After that he was Chief Investment Strategist for the Bonner & Partners Family Office for four years, a project set up by Agora founder Bill Bonner that focuses on successful inter-generational wealth transfer and long term investment. Rob has lived in Buenos Aires, Argentina for the past eight years, which is the perfect place to learn about financial crises.

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