The Atlanta Fed's macroblog provides commentary and analysis on economic topics including monetary policy, macroeconomic developments, inflation, labor economics, and financial issues.

Authors for macroblog are Dave Altig, John Robertson, and other Atlanta Fed economists and researchers.

January 26, 2009

The piggybank effect

During the 2002–2007 economic expansion, the personal savings rate fell to below 1 percent of disposable income. The savings rate had declined steadily from over 12 percent in the 1980s' recession. What changed the way people allocated their budgets?

U.S. household wealth grew considerably as home prices and the stock market soared. According to the Wall Street Journal, "Starting in the late 1990s, soaring stocks made Americans feel richer…. Savings jumped for a bit following the 2001 recession, but plummeted afterwards as housing prices rose, again making Americans feel that it wasn't especially important to save."

Behavioral changes across generations may have also affected the attitude toward savings and debt. A study by McKinsey Global Institute shows that baby boomers' reduced savings is what accounts for most of the collapse in the U.S. household savings rate.

Some have been saying that over the past several years Americans had been "living beyond their means," saving little and shopping conspicuously. According to Merrill Lynch economists, the average household owns nearly $40,000 of nonhousing durable goods assets, a number that has tripled since the mid-1980s.

Since the economy slowed last year, consumers have become more cautious with their income. This fact is not surprising given record lows of consumer confidence, declining house prices, a sharply lower and still volatile stock market, and mounting job losses. Consumers now appear to be shifting toward saving. By November 2008, the personal savings rate rose to 2.8 percent. Many expect it to increase further. According to several forecasters, the savings rate is likely to reach nearly 5 percent by 2011, reducing spending relative to what it had been before the recession.


But what will happen when the economy starts growing again? Will consumers behave the same as in the past, returning to lower savings and higher spending? Or will a more frugal mentality continue?

Some Merrill Lynch economists believe this time the rising savings rate is a secular trend. According to them, attitudes toward spending and debt have changed semi-permanently, and the United States is facing what they term a frugal future. However, Macroeconomic Advisers and Oxford Economics estimate the savings rate will begin to decline somewhat as the economy gathers steam in 2011, although it will still remain higher than in 2005–2007. The forecasters think Americans will save between 2.5 percent to 4.5 percent of their disposable income after this recession runs its course—hardly frugal, but perhaps not "beyond their means."

By Sandra Kollen and Galina Alexeenko, senior economic research analysts at the Atlanta Fed

January 26, 2009 in Business Cycles, Saving, Capital, and Investment | Permalink


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My fear is that this summer, should the cost of gas remain near 2.00, that essential symbol of the American, the SUV, will be back in vogue.

Actually, that is my prediction.

Posted by: esb | January 26, 2009 at 10:01 PM

The Fed's data on consumer purchases of durable goods shows a different picture than the comment implies. The net purchases were around $100 billion in the mid 80s, fell to about $50 after the 90 recession, then rose to about $200 prior to the 01 recession. The interesting part is that it peaked prior to the 01 recession and was very stable until the recent decline. Of course, this only relates to what consumers were spending, it says nothing about their means.

Posted by: Douglas Lee | January 27, 2009 at 11:14 AM

I guess the recession is my fault. My wife and I save about 30% of our income, we have no debt, we rent, and we don't own anywhere close to 40K worth of stuff, durable or otherwise. I'm sorry. Clearly we're failures as American consumers. So we obviously deserve to be punished by having the value of our savings (our work) be destroyed by the Fed's inflationary policies. It's only right that asset prices be propped up by government action. Since the prosperity of the past decade or so was an illusion propped up by debt, the best course of action is to make sure the debt bubble continues to grow. That's the road back to real wealth.

Posted by: Moopheus | January 27, 2009 at 01:30 PM

Why stop at 5%? The Baby Boomers are not going to be able to retire unless they save about the same as people saved in the 70s and 80s which is more like 10%. In fact, one would think that they need to save more like 20% to make up for their lack of savings over the past 10 years.

Posted by: David | January 27, 2009 at 10:43 PM

Does this savings rate include 401Ks? It is only logical for boomers to save to a tax deferred 401k before putting money into taxed time deposits.

Posted by: DR | January 28, 2009 at 10:25 AM

Nice piece, but I'd add two things. First, a lot of US saving shows up as savings by firms, since the tax system discourages distributions of earnings. Since firms are (on the whole) owned by people, it's somewhat misleading to look at personal saving on its own. Second, none of the standard saving rates include capital gains. You hint at this in your piece, but don't explain why, if saving is so low, we have so much net worth. (Less now, of course.) It would be nice to add, for example, a graph of the ratio of household net worth to GDP, or something like that. All of this and more is laid out nicely in a 1999 Brookings article by Gale and Sabelhaus.

Posted by: Dave Backus, NYU | January 29, 2009 at 08:43 AM

In order to compare: What are the saving rates in other countries?

Posted by: martin gale | January 29, 2009 at 09:34 AM

I'd love to see that chart back to fifties, and overlay real (un-Boskinized unhedonized) interest rates against it. Maybe people are more clever than believed.

From a different angle, meaningful modern measures of "savings" should perhaps include some measure home equity, mutual funds, directly-held shares, annuity and insurance-wrapped products, PV of defined benefit plans, and as DR points out 401k and defined contributions plans. Cash in the bank isn't what it used to be in any event.

Posted by: Cassandra | January 29, 2009 at 03:02 PM

"My fear is that this summer, should the cost of gas remain near 2.00, that essential symbol of the American, the SUV, will be back in vogue."

Only for the people who can get loans and still have secure jobs, who are also short-sighted schmucks.

Posted by: Jon H | January 29, 2009 at 06:18 PM

"Does this savings rate include 401Ks? It is only logical for boomers to save to a tax deferred 401k before putting money into taxed time deposits."

Lots of my friends are transferring cash from 401K to savings/checking for ready access. I wonder if this is a contributor to why the savings rate has increased suddenly.

Posted by: Mark Summers | January 29, 2009 at 06:30 PM

I agree with Cassandra, and others.

The baby boom often started their careers late (or switched careers) and put heavy demand into home ownership, plus had to fund their own pensions (a mixed blend, starting out with defined benefit, that went away, and transitioning into defined contribution). These are responsibilities that previous generations did not have as explicitly.

This has been a generation transitioning through all kinds of structural changes in an economy with declining marginal rates of growth. Plus during boomer lifetimes (OK, I am one), we have monetized a lot of labor (parenting, caregiving, meal preparation, etc.).

Ergo, we really do need to think carefully about how we are measuring 'savings,' and what it means since the structures and personal responsibilities of people's lives have changed dramatically.

Posted by: Laocoon | January 30, 2009 at 10:57 AM

Countries differ in the way household disposable income is reported (in particular whether private pension benefits less pension contributions are included in disposable income or not), therefore the comparison between savings rates in the United States and other countries could be difficult to make. However, the OECD adjusts for this difference when reporting savings rates in the member countries. In 2007, the savings rate in the OECD countries ranged from 13.1% in France to a negative 3.6% in Finland. Australia’s savings rate was reported at 0.3%, and the United States had the third lowest at 0.7%. Savings rates in Austria, Germany, Sweden, Switzerland, Belgium, and Spain were around 10%. Japan’s savings rate was reported at 3.2% and Korea’s at 3.9%.

Employee contributions to 401(k)-type plans are part of wages and salaries (a gross concept before deductions) in the period of the contribution. They are not part of outlays, and therefore are included in personal saving in the period of the contribution. Employer contributions to 401(k)-type plans are part of employer contributions for employee pension and insurance funds in the period of the contribution. Therefore, these contributions are included in personal income, they are not part of outlays, and are therefore included in personal saving in the period of the contribution.

Posted by: Sandra and Galina | February 05, 2009 at 10:58 AM

Common sense would indicate that a diversion from consumption to savings would represent a drag on economic growth. Indeed, the UST estimate that a move to 5% personal savings would sap $500bn from global demand (including multiplier effects). So, in the short-term, higher personal savings = bad for growth. The degree to which this personal saving is off-set by govt dis-saving will, I suppose, depend on the degree to which Ricardian equivalence holds, and the different multipliers that might attach themselves to household vs govt spending.

However, both neoclassical and endogenous growth theory appear to indicate that a shift to a higher savings rate leads to an increase in the level of GDP (in the case of neoclassical gt), or indeed the pace (for endogenous gt). So higher saving = good for growth (at the very least by moving steady state to a higher level assuming no technology).

Keynesian national accounting identities equate saving with investment. So doesn't have much to say about the impact on growth I guess.

And at a global level NET debt must always be zero, so there can be neither leveraging or deleveraging at the system level (although there could be among different sectors).

Please disentangle my confusion.

Posted by: Confused about saving | February 05, 2009 at 11:49 AM

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January 07, 2009

Will tax stimulus stimulate investment?

Update: Reader Doug Lee points out that the fixed investment series above is dominated by the extraordinary decline in residential investment over the past several years. For that sector, the questions posed above are in a bit sharper focus. Are firms in the residential investment sector pessimistic about future prospects? Absolutely. Are compromised credit markets behind the low investment levels? Quite possibly, though given the large inventory overhang in housing it is improbable that activity in the sector would be robust in any case. Is the low investment/net worth ratio symptomatic of a general deleveraging within the nonfinancial business sector? Not so clear, as it is pretty hard to see through the effect in residential category.

Here, then is a chart of the history of nonresidential fixed investment relative to corporate net worth:


The recent decline in the ratio, while still there, is much less dramatic and, in fact, seems to be part of a more persistent trend that commenced prior to the 2001 recession (and which may have been temporarily disguised by the housing boom that followed).

Was the nonfinancial nonresidential business sector ahead in the deleveraging game—ahead of residential construction businesses, financial firms, and consumers? And could this bode well for this sector when the recovery begins? Unfortunately, I have more questions than answers.

By David Altig, senior vice president and research director at the Atlanta Fed

Original post:

On Monday, the form of potential fiscal stimulus, 2009-style, took a step forward detail-wise. From the Wall Street Journal:

“President-elect Barack Obama and congressional Democrats are crafting a plan to offer about $300 billion of tax cuts to individuals and businesses, a move aimed at attracting Republican support for an economic-stimulus package and prodding companies to create jobs.

“The size of the proposed tax cuts—which would account for about 40% of a stimulus package that could reach $775 billion over two years—is greater than many on both sides of the aisle in Congress had anticipated.”

The plan appears to make concessions to both economic theory—which suggests that consumers will save a relatively large fraction of temporary increases in disposable income—and recent experience—which seems to suggest that what works in theory sometimes works in practice. Again, from the Wall Street Journal:

“Economists of all political stripes widely agree the checks sent out last spring were ineffective in stemming the economic slide, partly because many strapped consumers paid bills or saved the cash rather than spend it. But Obama aides wanted a provision that could get money into consumers’ hands fast, and hope they will be persuaded to spend money this time if the credit is made a permanent feature of the tax code.”

As for the business tax package:

“… a key provision would allow companies to write off huge losses incurred last year, as well as any losses from 2009, to retroactively reduce tax bills dating back five years. Obama aides note that businesses would have been able to claim most of the tax write-offs on future tax returns, and the proposal simply accelerates those write-offs to make them available in the current tax season, when a lack of available credit is leaving many companies short of cash.

“A second provision would entice firms to plow that money back into new investment. The write-offs would be retroactive to expenditures made as of Jan. 1, 2009, to ensure that companies don’t sit on their money until after Congress passes the measure.”

A relevant question here is really quite similar to the one we ask when the tax cuts are aimed at households: Will the extra cash be spent? This graph provides some interesting perspective:


Relative to net worth (of nonfarm nonfinancial corporate businesses), private fixed investment has been in consistent decline since the second quarter of 2006. (The level of fixed investment has declined in each quarter, save one.) In fact, the investment/net worth ratio is currently at a postwar low.

Why? A couple of hypotheses come to mind. (1) Firms are extremely pessimistic about the outlook and see relatively few worthwhile projects in which to commit funds. (2) Credit markets are so impaired that the net worth of firms—a critical variable in mainstream models of the so-called “credit channel” of monetary policy—is supporting increasingly smaller levels of lending. (3) Nonfinancial firms, like financial firms, are deleveraging and hence not expanding.

Of course, even if one of these hypotheses is true, it need not be the case that marginal dollars sent in the direction of businesses will go uninvested. But it makes you wonder.

By David Altig, senior vice president and research director at the Atlanta Fed

January 7, 2009 in Capital Markets, Saving, Capital, and Investment, Taxes | Permalink


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Very interesting to see some real data on this, which seems to support recent anecdotal evidence. I have written up two separate but related thoughts on stimulating business investment:

1. Should the stimulus aim at boosting investment instead of consumption, and how? http://www.knowingandmaking.com/2009/01/stimulus-spend-invest-or-incentivise.html

2. Should central banks consider equity investments if debt instruments are not effective in routing funding to the non-financial sector? http://www.knowingandmaking.com/2009/01/private-investment-by-central-banks.html

Posted by: Leigh Caldwell | January 07, 2009 at 11:10 AM

The loss carry back provisions seem to me like a particularly poor way to encourage investment and seem to smack of political pork to produce big transfer payments to financial sector companies. An investment tax credit would be much better, but I suspect investment demand is inelastic with respect to the cost of capital so most of the credit would go to projects that would have been undertaken anyway. Summers touted investment tax credits for machinery and equipment at one time. Has he been intimidated by the comment that crushed his research findings on the topic?

Posted by: don | January 07, 2009 at 02:00 PM

Since it seems to be a key question at the moment, can someone (Dave?) please explain to me why it matters whether a stimulus is saved or spent? Surely, in order to save it is necessary to find someone to lend to (even just holding a banknote is effectively an interest-free loan to the government). And they are not going to borrow unless they have a use for the money, so any money that is saved must be spent anyway.

Posted by: RebelEconomist | January 09, 2009 at 04:11 PM

Very interesting data indeed. Especially when you cross pollinate the data with Greg Mankiw's that shows that tax cuts have a greater effect on GDP than government spending.

We are in a deflationary time. Everything just gets cheaper. I don't view it as a spiral, because we were severely overleveraged. Once the leverage of the market reaches equilibrium, there should be some stable footing.

The government spending package will of course have a bunch of lard in it. Unfortunately, it will be too big, and because the government can't keep it up forever, people will save instead of spend. The jobs created for road building and bridge building are temporary. Once the road is built, the job goes away.
There will be some ancillary jobs that remain, but those will be small.

The way to really get business to invest is to make the cost of investing a lot cheaper. Businesses view taxes as a cost, so lower the corporate tax rate and the capital gains rate a bunch. This will spur business investment in long term capital projects that will encourage long term economic development.

But the bureaucrats in DC and Congress don't think that way.

Posted by: Jeff | January 12, 2009 at 08:46 AM


Very clear analysis, and reasonable conclusion. It's nice to read something about the stimulus subject that isn't completely guided by preconceived notions and admits to ambiguity.

Posted by: Bob_in_MA | January 12, 2009 at 08:46 AM

How about redistributing purchasing power through the tax system?

Poor people generally spend more of an extra dollar than rich people do. So redistribution can be expected to boost aggregate demand without simultaneously boosting public deficits.

Even weak households can of course be expected to save some of the extra dollars. Given their indebtedness, that’s not a bad thing.

One may argue that poorer people spend their dollars differently from richer. But many products sold lately were anyway meant to satisfy needs for rather conspicuous consumption. More resources must be allocated to the satisfaction of (slightly) more basic demands.

Growing inequality is a major explanation for the crises. For many households credit growth has worked as a substitute for wage growth.

This process will have to be reversed one way or another. We must make sure that wage differentials decreases rather than the opposite. In addition to tax breaks for the weaker households, mortgage assistance is needed.

When you run out of helicopters, distribute fresh money through increased unemployment benefits. This will improve the bargaining power of the weakest employees. But make sure the informal economy doesn’t explode. ID-cards for all wage earners are needed!

Jan Tomas Owe

Posted by: Jan Tomas Owe | January 13, 2009 at 08:12 AM

"The way to really get business to invest is to make the cost of investing a lot cheaper. Businesses view taxes as a cost, so lower the corporate tax rate and the capital gains rate a bunch. This will spur business investment in long term capital projects that will encourage long term economic development.

But the bureaucrats in DC and Congress don't think that way."

I agree, but the politicians are intent on solving the wrong problem with the wrong tools. You mention "long term" economic development - everything the Democrats and Obama want to do is SHORT TERM.

If the 'problem' they have to fix is short-term recession fighting, then the only lever that works efficiently at that is federal reserve monetary policy, and they've already done the "flood the zone" approach with 0% interest rates and 'quantitative easing'. Even though unemployment is no higher than in 1992, they want to go far far beyond what has been done in previous recessions. Why? I can think of no reason other than a sense of panic among the political elites, or a desire to misuse a recession for political aggrandizement.

But the short-term is the WRONG PROBLEM TO SOLVE. The correct problem to solve is to set the country back on the path of stable long-term economic growth. When we look back in 2012 at what was done in 2009, we wont care if the Q4 2009 numbers were this or that, we WILL care if we are saddled with an extra trillion of foriegn debt that we can't easily pay back, suffering under subpar growth because our deficits and inflationary policies got out of hand and we had to 'fix' that with high-tax high-interest-rate stagflation-era policies.

It's a myth that govt deficits will reflate the economy. What ever happened to the 'rational expectations' refutation of this? Every attempt to grow the govt will be met by more private sector layoffs - as the private sector realizes they will bear the pain of paying for this mess the govt makes.

Keynes was wrong. In the long run we aren't dead, in the long run we look back, older and wiser, and say: "What the hell were we THINKING?!?"

Posted by: Travis Monitor | January 18, 2009 at 11:32 PM

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November 06, 2008

Saving and taxes

I hope you will excuse me for trading in a bit of old news, but I’ve been thinking about a post by Greg Mankiw from last week. Titled “My Personal Work Incentives,” the item takes published details of the McCain and Obama tax proposals. The essence of the post was to point out how these details impact the return to working for higher-income individuals, assuming that a marginal dollar earned is a marginal dollar saved (for the children, of course):

“Let t1 be the combined income and payroll tax rate, t2 be the corporate tax rate, t3 be the dividend and capital gains tax rate, and t4 be the estate tax rate. And let r be the before-tax rate of return on corporate capital. Then one dollar I earn today will yield my kids:


“For my illustrative calculations, let me take r to be 10 percent and my remaining life expectancy T to be 35 years…

“Under the McCain plan, t1=.35, t2=.25, t3=.15, and t4=.15. In this case, a dollar earned today yields my kids $4.81. That is, even under the low-tax McCain plan, my incentive to work is cut by 83 percent compared to the situation without taxes.

“Under the Obama plan, t1=.43, t2=.35, t3=.2, and t4=.45. In this case, a dollar earned today yields my kids $1.85. That is, Obama's proposed tax hikes reduce my incentive to work by 62 percent compared to the McCain plan and by 93 percent compared to the no-tax scenario.”

Since the election is over, I trust that fact will keep the focus on the essential economic point, which is that tax policy does indeed affect incentives.

Which brings me to my point. Using Mankiw’s interest rate assumption, the present value of McCain’s $4.81 is $0.17 (which is implied directly by the 83 percent marginal tax rate). The comparable figure for Obama’s $1.85 is $0.07.

Mankiw’s point is that these sorts of numbers would substantially change his incentives to work. If the whole point is to leave a little nest egg for the kids, that is surely true, but there is another choice.

Here is another possibility: Suppose I forgo provisioning for the children altogether and simply consume that extra dollar of income. That way I avoid the corporate tax, dividend and capital gain tax, and the estate tax altogether. Under the McCain plan I get to enjoy $0.65 worth of extra consumption, or $0.57 worth under the Obama plan. I would have to value my children’s consumption an awful lot to trade $0.65 (or $0.57) of my own for $0.17 (or $0.07) of theirs.

As I think about this example, I am naturally drawn to the fact that savings rates in the United  States are, in an historical context, pretty darn low.

Personal Saving as a Percent of Disposable Income

There are almost certainly multiple reasons for the pattern shown in this chart. It would be tough to make the case that tax policy is the only culprit, but it would be equally tough to argue that it is irrelevant.

The distortion on saving from capital-income taxation could be eliminated, of course, by simply eliminating taxes on saving, but doing so would have exactly the sort of distributional consequences that account for a good deal of difference in the Obama and McCain tax plans in the first place. My training as an economist gives me no special expertise in determining how to value the trade-off between “fairness” and efficiency—and beware of any economist who pretends otherwise. But as you contemplate the distortions presented by your favorite tax proposal—a required step in any complete analysis—you might consider putting disincentives to save fairly high up on the list.


November 6, 2008 in Saving, Capital, and Investment, Taxes | Permalink


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I know this was not your point, but can you literally post Mankiw's analysis without discussing how few estates are actually subject to the inheritance tax? Is there any data that suggests that even if this extremely small sliver of the population subject to the estate tax actually does work less because of "disincentives," that overall output is lower (i.e., that those not subject to the estate tax do not "pick up the slack")? Is there any data that suggests that the money sent to the government via taxation does *nothing* to benefit this hypothetical worker's children? Do the taxes paid over to the government simply go into a hole? Is it impossible that any portion of those taxes actually benefited the children? Is it impossible that some high earners take pride in paying taxes while knowing that at least some small portion of the taxes are being used to build the communities in which their children will live? Do people have absolutely no incentive to help their communities unless they get a hospital wing named in their honor? With all due respect, let's admit that the incentives argument is usually far, far more complex than any blog post will ever be able to relate.

Posted by: Anonymous | November 06, 2008 at 04:50 PM

Except that the top tax rate from 1936-1981 was 70% or higher.

Corporate tax rates were 46% or higher from 1951-1986.

I can't find convenient numbers on estate and capital gains rates, but even Obama's proposals are at historically low levels.

But just with those two rates, his return would only be $1.89 in the 1970's. Factoring in 15% cap gains, and 15% estate taxes, and you get $1.22 for a 1970's investor vs. $1.85 for Obama's plan.

I'd speculate that 5-year CDs rates under 3% had something to do with the savings rate in the 2000's. Somewhat risky investments, like stocks, weren't doing significantly better.

And you could borrow money at single digits (in some cases low single digits).

And assets were increasing generating apparent wealth for everyone.

But I don't think it has to do with our (historically) relatively low tax rates.

Posted by: SKG | November 06, 2008 at 06:43 PM

Also, for example, a plumbing company entrepreneur with after tax NI of 250K plus would save more in taxes by hiring another worker at his newly purchased firm under the Obama than the McCain plan Since the deduction amount is higher against a higher marginal rate.

Furthermore the new worker pays payroll and income taxes which do not get dynamically scored, which means raising taxes raises employment rates AND total tax revenues. I'm sure the WSJ opinion page will cover this anomaly extensively.

Posted by: VennData | November 06, 2008 at 08:52 PM

Very interesting, as was the original.

However, wouldn't the analysis need to consider the implications of the two candidates' tax and spending plans on future deficits (and therefore, taxes for the children)?

In other words, I could propose a plan where we cut taxes to zero and borrow the entire federal budget. According to this analysis, that would yield a bigger inheritance and provide a greater incentive to work. But the kids doing the inheriting are going to have to pay that back through higher taxes. I worked hard, but it was a shell game. The kids just got taxed more later.

I think this analysis misses something that is missing from our political system as a whole - a clear distinction between a tax cut and a tax deferral.

Posted by: Chris | November 06, 2008 at 10:16 PM

Mankiw's math is suspect.

Why would he pay capital gains/dividend tax on 100% of his gross investment return every year? This implies 100% turnover of his investments every year. Why does he assume the entire investment will be taxed at the estate tax rate? Why does he assume that tax rates 35 years from now will be set by either 2008 Presidential candidate?

His boldest assumption is that the long-term value of r is invariant with respect to t1..t3. In a low-tax environment in which the National Debt increases geometrically over time, it is not obvious to me that r will stay constant or increase over time. It is plausible that the long-range value of r would be higher in a moderately higher tax rate environment.

Following Mankiw's logic, Warren Buffett would have never started investing.

Posted by: OreGuy | November 06, 2008 at 11:43 PM

For the life of me I can't understand any discussion dealing with tax reductions when I see the real issue as being over spending by the federal government. It seems as if this particular issue is never addressed by the media or elsewhere.

When was the last time the white house or members of Congress actually owned a company that hired people and put them to work verus talking about job creation that they have nothing to do with!!! any thoughts would be appreciated.


Posted by: norman | November 10, 2008 at 08:30 AM

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September 11, 2008

Will automatic enrollment boost 401(k) savings?

In August the Congressional Budget Office updated its annual long-term projection for Social Security and noted that “future Social Security beneficiaries will receive larger benefits in retirement—and will have paid higher payroll taxes—than current beneficiaries do, even after adjustments have been made for inflation and even if the scheduled payments are reduced because the trust funds are exhausted. However, CBO estimates that “under both scenarios, those benefits will represent a smaller percentage of beneficiaries’ preretirement earnings than is the case now.”

Looking ahead, it seems certain future retirees will increasingly rely upon defined contribution 401(k)-type plans upon retirement. That means that millions of workers, with a wide range of preparation and financial literacy, are expected to make sophisticated investment decisions that will shape their future financial well-being. Policymakers are focusing greater attention on ways to increase worker participation in 401(k) type plans. The 2006 Pension Protection Act (PPA) included measures to increase contributions by creating safe harbor provisions that permit employers to offer automatic enrollment in 401k plans. For employers to qualify, contribution rates for those enrolled automatically must be at least 3 percent of salary the first year of participation, rising one percentage point per year to at least 6 percent in the fourth year.

These measures incorporate insights from behavioral economics that 401k default options have a tremendous impact on how much workers will ultimately save for retirement. In the new edited volume Lessons from Pension Reform in the Americas, Beshears, Choi, Laibson and Madrian examined the impact on worker savings when workers are automatically enrolled by their employers compared to when they must actively opt in to a retirement savings plan. They found that when automatic enrollment in retirement plans is the default option, participation rates are much higher than when workers have to opt-in. Furthermore, many workers view the employer default savings option as an implicit endorsement of both the contribution rate and the distribution of funds. They find that default choices are not neutral; they play an important role in every stage of the lifetime savings cycle, including savings plan participation, contributions, asset allocation, rollovers, and decumulation. Default options become even more crucial as defined contribution plans in the United States and the rest of the world introduce more investment options for workers.

Since the Pension Protection Act was just passed in 2006, it is still too soon to know what long-range impact it will have on retirement savings. However, a new paper by VanDerhei and Copeland models the results of automatic enrollment under PPA rules and finds that it will have a significant impact, especially for low-income workers. For the lowest-income quartile, total 401(k) balances would be only 0.1 times final earnings at age 65, compared to 2.5 to 4.5 final earnings (depending on the assumptions used) under automatic enrollment. For the top 25 percent of earners, the jump would be from 1.8 times final earnings to between 6.5 to 10.4 times final earnings.

These automatic enrollees will of course need to decide how to invest their 401(k) savings. Target-maturity date lifecycle funds, where participants select a fund based on a projected retirement date and fund managers rebalance the portfolio over time, offer one solution to problems arising from financial illiteracy, naïve portfolio diversification, and inertia. In a new working paper, Mitchell, Mottola, Utkus, and Yamaguchi find that lifecycle plans will have a more substantial impact if they are designed as the default option, with adoption rates being higher still if employers actively shift participants from existing portfolios to age-based lifecycle funds.

Automatic 401(k) enrollment and lifecycle funds can potentially boost retirement savings. The extent to which employers and workers will embrace these options from the 2006 Pension Protection Act is an open question, but the early signals are positive. At a May 2008 Employee Benefit Research Institute forum on the 2006 PPA, participants noted that an increasing number or employers, especially large ones, are adopting automatic enrollment.

By Stephen Kay, coordinator of Latin American analysis at the Atlanta Fed

Note: Macroblog will not feature postings on monetary policy issues during the Federal Open Market Committee meeting blackout period, which runs from the week before the FOMC meeting until the Friday after it. Also, David Altig, senior vice president and research director of the Atlanta Fed, will not post during this timeframe.

September 11, 2008 in Labor Markets, Saving, Capital, and Investment | Permalink


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I would hope that there would be widespread consensus for this approach. But in a nation increasingly dominated by those with lower educational standards, one can never be sure.

I would hope that all responsible parties would agree that we need to save more as a nation. This proposal would assist in that national security goal.

I am persuaded that you are aware that this "libertarian paternalism" approach has been widely popularized by the delightful book "Nudge", authored by University of Chicago professors Thaler and Sunstein:


Matt Dubuque

Posted by: Matt Dubuque | September 11, 2008 at 03:01 PM

> adoption rates being higher still if employers actively shift participants from existing portfolios to age-based lifecycle funds

That doesn't sound "voluntarily" to me anymore - I want to keep the freedom to save differently than the herd.

Posted by: Peter T | September 11, 2008 at 06:00 PM


I would support the "default" option for 401(k) enrollment, but I would oppose "default" options for such life cycle allocations afterwards.

I don't trust the government to decide whether it's appropriate to invest in various portfolios with massive derivative exposure such as some of the "safer" bond funds that jack up returns with highly questionable and illiquid derivative strategies.

You might enjoy the book I cite. Quite popular among University of Chicago school adherents.

All freedoms are still present; you can opt out at any time for any reason without penalty. Hence the "libertarian" portion of its description as "libertarian paternalism".

Matt Dubuque

Posted by: Matt Dubuque | September 12, 2008 at 09:35 AM

Default options sponsored by governments are generally the most transparent and therefore the most vetted of default options.

And there is understandable laziness in making a non-default decision.

Hence the behaviour.

Posted by: anon | September 12, 2008 at 10:16 AM

After food, fuel and rent there is nothing left for savings.

Posted by: David | September 21, 2008 at 11:25 AM

You can pay fuel?

Is anyone ever going to point out that 401(k)s as primary retirement vehicles are the second-dumbest idea ever invented, behind IRAs?

Bad enough to put money you can't afford to lose in the stock market--as several people are finding out, again as, for the second time in a decade, a "once-a-century" event occurs--but then not to be able to take a tax credit on those losses...

Posted by: Ken Houghton | September 23, 2008 at 07:19 PM

Auto enrollment plans are showing positive results in terms of increasing savings. I think they are particularly helpful with getting younger employees started on the right track towards retirement savings.

Posted by: Snap401k | November 17, 2009 at 01:25 PM

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August 19, 2008

Did the stimulus package actually stimulate?

One of the big questions of the policy season is surely “Did the $100 billion of tax rebates distributed to households in May, June, and July actually work?” “Work” in this case means “stimulate consumer spending.” You may want to sit down before I tell you this, but so far economists disagree. In one corner you have Christian Broda at the University of Chicago and Jonathan Parker at Northwestern University:

The Economic Stimulus Act of 2008 was aimed at increasing disposable income temporarily through tax rebates in the hope this would stimulate spending and end or at least mitigate the severity of a U.S. economic slowdown. We find that to a significant extent they succeeded. The stimulus payments are initially being spent at significant rates. These rates are slightly higher than those observed in 2001 when fiscal policy has been credited with helping end the 2001 recession.

In the other you have Martin Feldstein:

Although press stories emphasizing that the rebates induced additional consumer spending were technically correct, they missed the important point that the spending rise was very small in comparison to the size of the tax rebates.

A recent, widely reported academic study by Christian Broda and Jonathan Parker showing that the rebates led to increased spending on nondurable items (like food and drugs) does not contradict the implication of the more comprehensive data—on national retail sales and total consumer spending—that the induced rise in consumer outlays was small relative to the size of the rebate.

Oh boy. Let’s back up a step. Before the fact, here is what people said they were planning to do with their rebates (by at least one report):


So what did the people receiving the rebates do with them? Well, if we could answer that one, it would be easy to resolve the Feldstein vs. Broda-Parker dispute. It does seem undeniable that a pretty good piece of those rebates was saved, at least in the first two months.


Can those elevated saving rates recorded in May and June reflect an outbreak of thriftiness? The real answer is “who knows?” but we can do a little back-of-the-envelope arithmetic to put things in perspective. Ignoring the Katrina-related dip in August 2005, the average saving rate from the beginning of 2005 through this past April was about 0.61 percent.

So, here’s the question: Assuming that consumers saved out of nonrebate income at the rate of 0.61 percent, how much would they have had to save out of the sums distributed in May and June to raise the overall saving rates to the observed values of 4.9 and 2.5 percent?

If you do the annualized calculation for the $43 billion of rebates in May and $28 billion in June you get some pretty striking numbers: An implied saving rate out of the rebates of somewhere in the neighborhood of 83 percent in May and 63 percent in June.

You can argue that there is a sense in which even these figures are understated. Durable goods purchases, for example, are theoretically a form of household saving, and the Broda-Parker survey respondents did indicate that about 20 percent of their rebates went toward the purchase of durables. However, if that is so durable expenditures without the tax rebates would have been really low. Though expenditures on durables grew at an annualized rate of 5.8 percent in May—not bad—they shrank by 17.4 percent in June.

These back-of-the-envelope calculations are pretty rough, of course, but they are broadly consistent with evidence from the 2001 tax rebates. That evidence also suggests that about one-third of the rebates were spent in the quarter following their disbursement, so the spending effects of this year’s model may yet have legs.

On the other hand, even if the rebates do prop up consumer spending in the short run, that would hardly settle the debate about whether they were the best way to spend $100 billion. But that’s a different debate for a different time.

August 19, 2008 in Saving, Capital, and Investment, Taxes | Permalink


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Looking forward to our class starting next month.

A possibly dumb question from someone who has not had macro in 15+ years, but are the savings rates shown in these charts permanent?

Say I get a check for $1000 and I deposit it in my savings account with the best of intentions, but 2 weeks later I see a great new gizmo I cannot live without and spend the entire amount I had 'saved'.

Initially, I saved the money and later I consumed with it. How does the data handle such a situation? To me, it looks like my actions might be double counted as both saving and spending.

Posted by: Diorex | August 19, 2008 at 06:30 PM

I will bet that not a penny of the rebates will be left in personal or family "savings" by December 24, 2008.

Yes, I read both of your references. Interesting assessments. Not sure what to think. But I will stick with my prediction.

Posted by: Movie Guy | August 20, 2008 at 12:38 AM

I hypothesize that the remainder of the stimulus will be spent in direct relation to a turnaround in consumer sentiment.

Posted by: Marco Loureiro | August 20, 2008 at 08:49 AM

Looking at the 2001 episode, I can see no basis for tha argument that any of the rebate was saved - unless there is another explanation for the downward spike in the saving rate that occurred after the upward spike.

Posted by: don | August 20, 2008 at 04:22 PM

1. You state, "the spending effects of this year's model may yet have legs". Does this not miss the point of the stimulus? I thought the point of a fiscal stimulus was to get money in the hands of consumers faster (so they can spend it) than could otherwise be done through monetary policy initiatives.
2. Doesn't this simply prove what you taught us about the marginal propensity to consume? Since the increase in disposable income (tax rebate) is temporary and not permanent, the incentive to increase consumption will be (has been) limited. Perhaps you should teach your Macro course up on Capitol Hill so that we don't have to have this debate in the future!

Posted by: Ken | August 20, 2008 at 08:47 PM

I am not American but I suspect that people spent their money on the petrol and food instead of saving.

Posted by: Man | August 21, 2008 at 01:01 AM

Why is there no discussion of the import share of spending from the stimulus checks? One survey (the Fed's beige book?) said that a lot of the PCE was for electronics, almost all of which are produced abroad. To the extent that the stimulus was spent on imports: the US borrowed money from abroad, sent checks to almost all households, who used a portion of the money to buy imported goods. Brilliant policy! Great for China; not for the US.

Posted by: Charlie Poole | August 21, 2008 at 12:36 PM

A couple of responses: To the question of whether the change in saving is permanent, the simplest response is probably "no.” The evidence of the 2001 tax cut clearly suggests that the "marginal propensity to consume"—that is, the fraction of the extra income spent—is smaller in the quarter the rebates are disbursed than it tends to be over several quarters. Does that run counter to the intent of the policy? I'd be inclined to say "no" here as well: If there is a fairly strong impact on spending for the year as a whole, I would count that as stimulating consumption spending even if the bulk of the impact occurs with a delay of a quarter or two.

The issue of whether or not rebate checks were spent on food and gas is an interesting one. One of the observations in the Parker and Broda study is that sales shifted from traditional grocery stores to supercenter outlets. The latter of course are more likely to sell fuel. As an example, in Wal-Mart's second quarter revenue report, fuel sales accounted for about half of the growth in sales at their Sam's Club stores.

I'll note that it is not too hard to construct a story that an outsized (by which I mean bigger than theoretically predicted) response to spending would be a perfectly rational response if consumers were actually expecting the pullback in oil and gasoline prices that has actually occurred. If the tax rebates are expected to more-or-less match higher energy prices, which themselves are also believed temporary, it would be perfectly reasonable for consumers to react by smoothing the impact on other types of spending by allocating the rebates to their bills at the pump.

As to whether the rebates went to imports, I don't know. The foregoing discussion of gasoline spending would be consistent with that—though China would not be the destination in this case. But more to the point, import growth did fall off substantially in the 2nd quarter, which is actually one of the bigger stories of the year's first half: http://www.marketwatch.com/news/story/economic-preview-big-upward-gdp/story.aspx?guid=%7BA62AF198-2B21-42D7-A11C-601643E74137%7D&dist=hpts.

Posted by: David Altig | August 25, 2008 at 06:02 AM

There is nothing in this post that suggests income tax refunds also start arriving in May,June,and July. Some that may have spent more heavily around that time may have been inclined to put something back from the rebate. This would help explain the pre - May downward spike bfore the upward boost.
Does this data include the entire spectrum of incomes? If so tax refunds were falling on those in the upper brackets, who did not set up their withholdings to minimize government use of their incomes, as well.
That could also affect the savings rate as those in the upper incomes may have been hedging, and their savings rate has the potential of being much higher, enogh to affect the aggragate picture.

Posted by: Dennis | September 18, 2008 at 10:28 PM

How about redistributing purchasing power through the tax system?

Poor people generally spend more of an extra dollar than rich people do. So redistribution can be expected to boost aggregate demand without simultaneously boosting public deficits.

Even weak households can of course be expected to save some of the extra dollars. Given their indebtedness, that’s not a bad thing.

One may argue that poorer people spend their dollars differently from richer. But many products sold lately were anyway meant to satisfy needs for rather conspicuous consumption. More resources must be allocated to the satisfaction of (slightly) more basic demands.

Growing inequality is a major explanation for the crises. For many households credit growth has worked as a substitute for wage growth.

This process will have to be reversed one way or another. We must make sure that wage differentials decreases rather than the opposite. In addition to tax breaks for the weaker households, mortgage assistance is needed.

When you run out of helicopters, distribute fresh money through increased unemployment benefits. This will improve the bargaining power of the weakest employees. But make sure the informal economy doesn’t explode. ID-cards for all wage earners are needed!

Jan Tomas Owe

Posted by: Jan Tomas Owe | January 13, 2009 at 08:12 AM

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June 21, 2007

Dark Matter By Any Other Name

From Austin Goolsbee, via Mark Thoma:

... The United States miracle of the 1990s was that our productivity began growing faster than that of other countries, even though we were the richest to start with...

To explain the experience in the United States, one would have to believe that Americans have some better way of translating the new technology into productivity than other countries. And that is precisely what [London School of Economics] Professor [John] Van Reenen’s research suggests.

His paper “Americans Do I.T. Better: U.S. Multinationals and the Productivity Miracle,” (with Nick Bloom of Stanford University and Raffaella Sadun of the London School of Economics) looked at the experience of companies in Britain that were taken over by multinational companies with headquarters in other countries. They wanted to know if there was any evidence that the American genius with information technology transfers to locations outside the United States. If American companies turn computers into productivity better than anyone else, can businesses in Britain do the same when they are taken over by Americans?

And in the huge service sectors — financial services, retail trade, wholesale trade — they found compelling evidence of exactly that. American takeovers caused a tremendous productivity advantage over a non-American alternative.

When Americans take over a business in Britain, the business becomes significantly better at translating technology spending into productivity than a comparable business taken over by someone else. It is as if the invisible hand of the American marketplace were somehow passing along a secret handshake to these firms.

Sound familiar?  If you can't quite put your finger on it, here's a refresher from Ricardo Hausmann and Federico Sturzenegger:

There is a large difference between our view of the US as a net creditor with assets of about 600 billion US dollars and BEA’s view of the US as a net debtor with total net debt of 2.5 trillion. We call the difference between these two equally arbitrary estimates dark matter, because it corresponds to assets that we know exist, since they generate revenue but cannot be seen (or, better said, cannot be properly measured)...

At least three factors account for the accumulation of dark matter. The first refers to foreign direct investment (FDI). Consider a simple example. Imagine the construction of EuroDisney at the cost of 100 million (the numbers are imaginary). Imagine also, for the sake of the argument that these resources were borrowed abroad at, say, a 5% rate of return. Once EuroDisney is in operation it yields 20 cents on the dollar. The investment generates a net income flow of 15 cents on the dollar but the BEA would say that the net foreign assets position would be equal to zero. We would say that EuroDisney in reality is not worth 100 million (what BEA would value it) but four times that (the capitalized value at our 5% rate of the 20 million per year that it earns). BEA is missing this and therefore grossly understates net assets. Why can EuroDisney earn such a return? Because the investment comes with a substantial amount of know-how, brand recognition, expertise, research and development and also with our good friends Mickey and Donald. This know-how is a source of dark matter. It explains why the US can earn more on its assets than it pays on its liabilities and why foreigners cannot do the same. We would say that the US exported 300 million in dark matter and is making a 5 percent return on it. The point is that in the accounting of FDI, the know-how than makes investments particularly productive is poorly accounted for.

That story might only go so far, as the Federal Reserve Bank of New York's Matthew Higgins, Thomas Klitgaard, and Cedric Tille claim...

... we review the argument that the United States holds large amounts of intangible assets not captured in the data—assets that would bring the true U.S. net investment position close to balance. We argue that intangible capital, while a relevant dimension of economic analysis, is unlikely to be substantial enough to alter the U.S. net liability position.

... but it's apparently more than a fairy tale.

June 21, 2007 in Economic Growth and Development, Saving, Capital, and Investment, This, That, and the Other, Trade Deficit | Permalink


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June 09, 2007

Like Ben Said

Calculated Risk makes an interesting observation:

The trade deficit, ex-petroleum, appears to have peaked at about the same time as Mortgage Equity Withdrawal in the U.S.

"Interestingly, the change in U.S. home mortgage debt over the past half-century correlates significantly with our current account deficit. To be sure, correlation is not causation, and there have been many influences on both mortgage debt and the current account."
Alan Greenspan, Feb, 2005

... Declining MEW is one of the reasons I forecast the trade deficit to decline in '07. And a declining trade deficit also has possible implications for U.S. interest rates; as the trade deficit declines, rates may rise in the U.S. because foreign CBs will have less to invest in the U.S.. This is why I forecast rates to rise in '07.

I think that CR has the causation running from the housing market to the trade deficit, but as always there is another interpretation.  I take you back to one of my favorite Fed speeches of all time, from the current Fed chairman:

What then accounts for the rapid increase in the U.S. current account deficit? My own preferred explanation focuses on what I see as the emergence of a global saving glut in the past eight to ten years...

The current account positions of the industrial countries adjusted endogenously to these changes in financial market conditions. I will focus here on the case of the United States, which bore the bulk of the adjustment...

After the stock-market decline that began in March 2000, new capital investment and thus the demand for financing waned around the world. Yet desired global saving remained strong. The textbook analysis suggests that, with desired saving outstripping desired investment, the real rate of interest should fall to equilibrate the market for global saving. Indeed, real interest rates have been relatively low in recent years, not only in the United States but also abroad. From a narrow U.S. perspective, these low long-term rates are puzzling; from a global perspective, they may be less so.

The weakening of new capital investment after the drop in equity prices did not much change the net effect of the global saving glut on the U.S. current account. The transmission mechanism changed, however, as low real interest rates rather than high stock prices became a principal cause of lower U.S. saving. In particular, during the past few years, the key asset-price effects of the global saving glut appear to have occurred in the market for residential investment, as low mortgage rates have supported record levels of home construction and strong gains in housing prices. Indeed, increases in home values, together with a stock-market recovery that began in 2003, have recently returned the wealth-to-income ratio of U.S. households to 5.4, not far from its peak value of 6.2 in 1999 and above its long-run (1960-2003) average of 4.8. The expansion of U.S. housing wealth, much of it easily accessible to households through cash-out refinancing and home equity lines of credit, has kept the U.S. national saving rate low--and indeed, together with the significant worsening of the federal budget outlook, helped to drive it lower...

The direct implication, of course, was that the reversal of U.S. current account deficits would likely be associated with higher real interest rates, a weakening of foreign-capital financed investment, and higher saving in the U.S. (of which a slowdown in mortgage equity withdrawals could be a part). It is worht noting that Chairman Bernanke was decidedly less than sanguine about the consequences of such adjustments:

... in the long run, productivity gains are more likely to be driven by nonresidential investment, such as business purchases of new machines. The greater the extent to which capital inflows act to augment residential construction and especially current consumption spending, the greater the future economic burden of repaying the foreign debt is likely to be.

Whether or not Mr. Bernanke believes that we find ourselves in the process of meeting those burdens I cannot say.  But those who buy the global saving glut story -- as I do -- have acknowledged all along that the day of adjustment would look pretty much like it does at the moment.

June 9, 2007 in Federal Reserve and Monetary Policy, Housing, Saving, Capital, and Investment, Trade Deficit | Permalink


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There is actually an even simpler explanation:

1) Net foreign investment must equal the cumulative trade deficit (their dollars must by definition ultimately return to the US)

2) Foreign investment in the US can be assumed to be in all asset classes, since even if it is not their buying of one asset will make other assets more attractive to domestic investors.

3) Therefore, changes in net foreign investment must be equally offset by changes in net trade and reduced borrowing by US consumers must be accompanied by less spending on foreign goods.

It doesn't have to hold in any given year, but in the long run it is almost a mathematical identity.

Posted by: Trent | June 09, 2007 at 03:21 PM

According to Roach, there is no global savings glut, just a shift in the mix away from rich countries.

Posted by: BR | June 09, 2007 at 04:03 PM

The current account deficit may narrow because our demand for foreign credit weakens or because the supply of that credit weakens. In both cases, the implication for the dollar is that it declines, other influences held unchanged. However, the implication for interest rates depends critically on whether the reduced external borrowing reflects demand- or supply-side influences. A deceleration of MEW in resopnse to a less robust housing sector -- assuming it is even relevant -- would be a demand-side development and could not generate upward pressure on interest rates. Calculated Risk has this point wroong.

Posted by: Gerard MacDonell | June 15, 2007 at 01:58 PM

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April 26, 2007

A Credit Crunch It's Not

It does appear that Wall Street is pretty happy with the way the world looks this week. U.S. macroeconomic data is only part of that picture, of course, but to the extent that it is I think Dean Baker makes good sense:

The Commerce Department's data did show better than expected durable good orders in March, but this was following very weak reports in January and February. Year over year, durable good orders are still down by more than 3 percent in nominal terms... Against a backdrop of serious weakness, a better than expected month is always good news, but it seems a bit excessive to make too much of this very erratic data.

The other cause for celebration was a 22,000 increase in the rate of new home sales in March, measured against a downwardly revised February level. The basis for the celebration here escapes me. The consensus forecast was for a considerably larger bounceback from the weak February level. Even with the uptick, March sales were the slowest since the recession, excluding February. And the small uptick was almost certainly driven by weather...

But I'm finding some comfort in a Wall Street Journal article (hat tip to Calculated Risk) titled "Home Equity Stalls" (page D1 of the print edition):

After years of piling debt on their homes, Americans are becoming more cautious about using them as a piggy bank.

A cooling housing market and higher interest rates have made homeowners more reluctant to tap the equity they may have built up in their residences...

Now, the slowdown in home-equity borrowing is leading to weaker sales in some markets for autos, building materials and electronics, says Mark Zandi, chief economist of Economy.com.

Barry Ritholtz sounds off on that last theme, and Calculated Risk is beginning to worry about a consumer-led recession.  So why would I feel encouraged?  The WSJ article continues:

Lenders are responding to slowing demand for home-equity borrowing by boosting their marketing, unveiling special offers and focusing on traditional uses of home equity, such as home improvement and debt consolidation. Wells Fargo this week rolled out a "Home Improvement Program" that gives home-equity customers discounts at retailers such as Best Buy, Brookstone and LampsPlus.com and access to a network of third-party local contractors.

J.P. Morgan Chase & Co. is running its first cable-television advertising campaign for home-equity borrowing, focusing on the product's flexibility. It's also rolling out a training program designed to help bankers in Chase branches do a better job of selling home-equity products. Bank of America, has launched a "green" home-equity card program, in which the bank will make a $100 donation to environmental group Conservation International on behalf of new home-equity customers who use their equity-line Visa card for purchases of $2,500 or more.

In my view, the biggest threat from housing-sector woes has all along been the possibility of spillovers into credit markets -- the kind that can restrain economic activity even after consumers and businesses shake off some of the caution that the stress of uncertainty inevitably brings.  Several posts back I offered the opinion that a lack of available credit does not seem to be the driving factor behind weak growth in business investment.  Today's story suggests that the same may be true of consumers.  And that may just be the difference between a soft patch and downright ugliness.   

April 26, 2007 in Data Releases, Housing, Saving, Capital, and Investment | Permalink


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It may depend on what one means by a “credit crunch.” Banks are still in the business of making loans, and I didn’t imagine they would stop wanting to make loans to borrowers they consider creditworthy. But certainly for the lending industry overall, and probably for banks specifically as well, credit standards have clearly tightened. Just how much they have tightened remains to be seen. At the same time, demand for loans has declined. If banks are trying to push a comparable volume of loans into a significantly smaller market, they have to sell more aggressively. I would say, the absence of a clear intensification of marketing efforts in the prime credit sector would be a very bad sign. It is surely still open to question whether any observed intensification is sufficiently strong to compensate for the tightening of standards.

Posted by: knzn | April 27, 2007 at 09:11 AM

More aggressive marketing looks like a response to softening demand, and demand will soften most in segments that are still creditworthy by today's perverted standards but subjectively up to the eyeballs or inhibited by the chilling effect of aggressive collection and insolvency all around. But sincere congrats to the Fed for their optimism in defense of price stability. It's well past time.

Posted by: stringpusher | April 27, 2007 at 09:28 AM

Often advertising serves as a very good leading indicator.

Why is Sears widely advertising deep sales on white goods?

If you watch CNBC you would be amazed at the number of ads they are running for unconventional mortgages. What is this a sign of?

Posted by: spencer | April 27, 2007 at 10:02 AM

I believe the increases we've seen in CA home prices since '97 is typical of the Bubble states, & that our Bubble states have accounted for more than 40% of national r.e. sales over (at least) the last 4 years. With CA contributing about 12% of our GDP how can its residential r.e. prices revert to its long-term growth rate WITHOUT drawing the country into a recession?
This is worth the read:
April 25, 2007 "O.C. vs. U.S. home price gap approaches $500,000", Jon Lansner, OCRegister Blog link: http://blogs.ocregister.com/lansner/
"My quasi-annual check-in with an odd barometer tells me that Orange County housing is still pretty expensive. By comparing Realtors' median selling price data for Orange County and the nation, I found that in March our $706,650 median house was 3.26 times the nation's $217,000 typical price tag. At 3.26, the "Orange County premium" is slightly higher than the measure for all of 2006 but slightly lower than 2003 and 2004. Look at it this way, our mid-priced house costs $489,650 more than the nation as a whole. Since 1981, the "Orange County premium" has averaged 2.3, meaning a typical Orange County home has cost 2.3 times more than what buyers pay nationwide. Not that "revert to the mean" is always right, but it's worth noting that it would take a $201,000 drop in local prices to bring current pricing back in line with the historic premium. This Sunday, my Register column discusses this premium -- and how it got me into trouble five years ago. (Want a hint? CLICK HERE:" http://www.ocregister.com/ocregister/money/abox/article_1114525.php
Posted by Jon Lansner at 11:32 PM

My single question is, why would anyone at the FED think it's in our country's long-term economic interest for it to intercede to "ease" the pain caused by the coming (& much needed) r.e. price reversion?

Posted by: bailey | April 27, 2007 at 12:44 PM

On the topic of consumer led recession, I'll throw in a 98% probability pointless anecdote.

We've paid the AMT for years, so I suppose we're upper middle class. We (knowingly and reluctantly) overpaid (10% over at least) for a home at the peak of the market, but it was, by traditional measures, well within what we could afford.

Here's the kicker. We're not saving money any more. We've reasonably cheap tastes, so we've never had to worry much about saving. It just happened. Now we are neutral to negative.

We're still analyzing, but the bottom line is that coasts have risen faster than revenues across the board for us for about five years. Taxes (AMT, real estate, local, state), replacing things that don't last, communication costs, home costs, groceries, costs of eating out, everything.

I'm starting to ask around. My neighbors tell a similar story.

We're going to be cutting back fairly savagely. I wonder how often this is happening now ...

Posted by: Anonymous coward | April 29, 2007 at 08:52 AM

Excellent info, I liked it.

Posted by: Alex | June 30, 2007 at 05:55 AM

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April 12, 2007

Capital Spending Concerns On The Chart With A Bullet

Barry Ritholtz said it yesterday...

It is increasingly apparent from the many economic signals we have seen that business spending is fading, and is unlikely to replace consumer spending anytime soon. This is one of the reasons are recession expectations keep ticking higher, beyond 50%.

... and in an article dated tomorrow but posted online today, the Wall Street Journal reports that its own survey of economists reveals a similar concern, if not quite the same degree of pessimism:

Weakness in business capital spending is edging out housing as the dark cloud on the U.S. economic horizon.

A new WSJ.com survey found that 20 of 54 economic forecasters responding to a query cited soft capital spending as the chief risk to their forecast that the U.S. economy will grow slowly but avoid recession this year.

It is pretty clear from whence the worry comes:

The Commerce Department says overall business investment fell an inflation-adjusted 3.1% in the fourth quarter, the first drop since early 2003. And government measures of orders for and shipments of capital goods so far this year have been unexpectedly weak...

The Fed, in minutes of its March meeting released this week, said that "financing conditions and other fundamentals remained favorable for a pickup in capital spending."

But the current softness comes as a surprise to many analysts. Indeed, the Fed minutes noted, "Investment in goods and services other than transportation and high-tech equipment softened more than fundamentals had suggested."

The consensus, however, remains on the side of continued expansion:

Economists responding to the WSJ.com survey were slightly gloomier about the prospects for the U.S. economy than they were a month ago. On average, they now estimate the economy grew at a 2% annual rate in the first quarter, down from the 2.3% estimate they made in March. They predict the economy will grow at a 2.2% pace in the current quarter and pick up momentum in the second half...

On the whole, economists see limited risk of recession over the next 12 months, putting the probability at 26%, near the same level of risk they've forecast since last summer. When asked to identify the one economic indicator they would watch to determine if the economy will slip into recession, 23 of 58 named the Labor Department's monthly employment report...

Although I think Barry was correct in his warnings to not get carried away with the March employment report, the jobs picture is still the best reason to stay calm.

UPDATE:  Not surprisingly, The Big Picture notices this story too. Mr Ritholtz, however, seems to think tight monetary policy is the root cause:

When your growth is dependent upon cheap money and easy credit, guess what happens when credit tightens and money becomes less easy?

I don't know about that take -- "money" doesn't seem to me to be the problem.  I'd worry about something more fundamental being afoot.

April 12, 2007 in Saving, Capital, and Investment | Permalink


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I see little reason to see employment as a leading indicator. Last time, in December 2000, unemployment was something like 4.4% - just 2 month before recession.

Posted by: theroxylandr | April 12, 2007 at 10:36 PM

Well things are different now theroxy, water runs uphill when you aren't looking and more.
The employment picture as per the 4.4% UE stat suggests a tight labor market in the same way that 5.25% FF rate suggests tight money supply.

It used to.

Now there are blockages to suggestion reception: even businesses are not spending those profits on plant expansion --they no longer believe the suggestion that the tight labor market is a capable consumer; they would rather take their chances on M&A and be a survivor; they don't have any respect for that "tight" 5.25% FF rate because they don't need to borrow...not like their employees who may not be able to spend the house indefinitely. His current irrational exuberance illustrated by the core CPI stat is anchored by the housing proxy OER which is climbing...just like that water running uphill.

Posted by: calmo | April 13, 2007 at 03:21 AM

Before the jobs report we were looking at a 1st Q gain in hours worked by production workers of around zero. Now it is 1.5%.
If the hours worked in the productivity report grows at the same pace -- before this cycle that was a safe assumption but in this cycle the jobs data shows stronger hors worked growth-- this implies that with 2% real GDP report productivity growth will be under 1%.

Productivity growth is an outstanding leading indicator
-- compare real gdp growth to productivity growth lagged two quarters --and this would imply even further slowing of the economy over the next two quarters.

Posted by: spencer | April 13, 2007 at 10:40 AM

Just to clarify, the argument is that business spending is the risk to the outlook for below trend but not recessionary growth. Housing was largely responsible for the expectation of below trend growth. The new risk is from business spending. That needn't mean business spending will be a bigger drag than housing. It just means business spending is the less widely expected drag. Identifying business spending as the risk to the earlier view need not be a matter of magnitude. It can be - and probably is - a matter of newness.

Gotta say though, the slowdown in business spending is not a surprise to everybody. Keying on profits to the exclusion of all else, as Fed officials seemed to do a few months back, may prove to be a mistake. Orders, industrial production, spending plans and a number of other series could have given you the willies several month ago.

Posted by: kharris | April 13, 2007 at 02:49 PM

Business spending is going to collapse from housing/lending crisis like it collapsed with the dot.com/equity bust in 2000.

When it starts declining in double digit %'s, manufacturing will contract signifigently and that leaves only the little consumer left.

Will they continue on with the debt binge or will that finally turn out the lights and trigger a MAJAR recession?

I am surprised people can't put A+B+C together.

Posted by: ac | April 13, 2007 at 05:35 PM

Employment is a coincident indicator. It never gives an advance recession signal. It could be safely ignored.

Why this time should be different?

Posted by: theroxylandr | April 22, 2007 at 08:47 AM

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March 20, 2007

Where The Risk Is

And so it appears that the moment of truth is near, when we will finally see beyond the immediate fate of the housing market and determine the magnitude of the collateral damage (no pun intended).  I think that there is a consensus that, if the worst is to come, some sort of substantial disruption to financial markets will be in the middle of it all.  Nouriel Roubini covers about every inch of territory you can on this theme, even managing to juxtapose Alan Greenspan and Ben Bernanke with foreign-policy neo-conservatives.  In somewhat more measured tones, Kash Mansori and Calculated Risk have begun to fret about the potential for spillover into the commercial banking sector.  Says Kash:

In my previous post I explained why I think that the quantity of bad mortgages in the US economy may actually be enough to significantly affect the non-performance and write-off rates for the US banking system as a whole. Yesterday, Calculated Risk followed this up with a discussion of why he thinks that the health of commercial real estate loan portfolios may soon suffer the same fate that residential loan portfolios are currently experiencing.

Some of that is not speculation, as this story from own neck of the woods so clearly shows:

The quaking U.S. market for subprime mortgage loans is rattling National City Corp. too.

The parent of National City Bank of Pennsylvania has decided it won't try to sell $1.6 billion in subprime loans after all, due to "adverse market conditions," National City said in a securities filing Thursday. The loans "are currently not saleable at what management considers an acceptable price," the bank said.

Instead, Cleveland-based National City took a write-down of $11 million in February, and sometime this month will return to its portfolio the loans it had intended to sell. "A further write-down is likely," the filing said. Spokeswoman Kristen Adams would not elaborate...

Additionally, National City expects to add "on the order of $50 million" to its reserves for possible loan losses, the filing said.

But here's how the story ends:

National City shares closed yesterday at $35.99, up 30 cents.

Hmm.  Frankly, I just don't think the traditional banking sector is where be the dragons.  Instead, I worry about the answers to three questions: 1. Will a growing perception of risk begin to choke off lending to investment projects that are otherwise economically viable?  2. Will a growing perception of risk cause businesses to forgo or defer an increasingly large quantity of investment projects?  3.  Have hedge funds, private equity funds, and specialty financial corporations become such important parts of the credit channel that there is scant relief to be found from a relatively unscathed traditional banking sector?

To question 1, we have this, from Bloomberg:

Risk premiums on investment-grade corporate bonds are at their highest level in more than three months on concern rising delinquencies by subprime borrowers will slow the U.S. economy...

"This period of volatility is likely to continue as long as there is divided opinion about the magnitude and resulting financial impact of the subprime problem,'' said Edward Marrinan, head of North American credit strategy at JPMorgan Chase & Co. in New York. "Subprime risks and accompanying fears of a spillover into the broader consumer sector are the catalysts for the heightened volatility currently exhibited by all risky asset classes,'' he said in an interview...

The 7-basis-point increase in investment-grade spreads is the index's worst three-week performance since the period ending May 20, 2005, Merrill data show. The increase means a company would pay $70,000 more in annual interest for every $100 million borrowed.

We might hold on to the belief that firms are partially insulated from rising borrowing costs (or restrictions on loan availability) due to the fact the corporate cash-flow to investment ratio remains relatively high...




... but there are two problems with seeking shelter in that picture.  First, we have data only through the third quarter of 2006, which is pretty stale information at this point.  Second, and more importantly, a high cash-flow to investment ratio may itself be a symptom of business's unwillingness to commit to fixed investment spending.

To question number 3, I have no idea what the answer is.  And I wish I did.

March 20, 2007 in Housing, Interest Rates, Saving, Capital, and Investment | Permalink


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"Hmm. Frankly, I just don't think the traditional banking sector is where be the dragons."

Fannie Mae got some attention from Bernanke recently, like his noisy predecessor, asking for more constraints...as if there were dragons, no? It has been a few years since this company has filed an annual statement and a special privilege to still be allowed a listing on the market.
Kasriel years ago (03?) warned of banks' record exposure even then to income streams from mortgages or mortgage related activities. So there could be many little dragons waiting for those moments when few are buying new mortgages --not to mention the defaulters.

China makes a splash recently about not adding to its US foreign reserves. That kindness of strangers might ebb a little, but if the consumer weakness materializes as some think in the months ahead, that trade picture might improve with decreasing Imports like we saw last quarter. This doesn't look like a dragon, but finding more private foreign investors to fund the deficits (esp that agency paper) and maintain the US status as "the best place to invest"--as the largest housing boom in history is fracturing, might be the largest dragon.

Posted by: calmo | March 21, 2007 at 01:03 AM

How's this for positive? I think the FED wording this a.m. was as strong as I could've hoped for. Good job, so far.
NOW, we let's hope Board members, who have a need to attend those week-after "free" luncheons, spend more time eating & less time soothing the heartburn of those who feed them.

Posted by: bailey | March 21, 2007 at 02:23 PM

Bozo re your observations on biz investment. Look at S&P500 free cash flow vs durable goods shiopments (ex defense and aircraft). This will give you a number up to date as of Jan. That biz investment is running at record lows relative to cash flows is no shock. Production platforms are now global in scale and the business investment that would normally occur in the US now occurs overseas. The surge in US direct investment overseas in recent years almost perfectly matches the "unusual" softness in biz investment in the US. That, along with sovereign flows explains why the cost of capital (i.e. bond yields are relatively low).

Posted by: Market God | March 21, 2007 at 09:35 PM

if the consumer weakness materializes as some think in the months ahead, that trade picture might improve with decreasing Imports like we saw last quarter,great lens thanks for sharing will credit this...

Posted by: scoremore | October 11, 2010 at 08:06 AM

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