US Politics: The People Voted. I am writing this before the votes have all been counted. No matter who won, close to half of the country will be in mourning, while the other half will hope that it’s a new morning for America. When he first ran for President, Barack Obama was the “hope and change” candidate. He was going to deliver “change we can believe in.” Donald Trump’s mantra was: “Make America great again.” Hillary Clinton’s campaign meme was: “Stronger Together.”
Unfortunately, the long and bitter presidential campaign probably set the stage for more divisive government than ever before. The outcome is likely to be more gridlock. As I wrote on Monday, that’s another way of saying more checks and balances, which has tended to be bullish more often than it has been bearish, for both stocks and bonds.
Credit: The Bond Vote. The stock market voted early on Monday with a big gain on expectations that the status quo, i.e., Hillary Clinton, will emerge this morning as the winner of the presidential race. Stock prices continued to rise yesterday on Election Day (Fig. 1). FBI Director James Comey’s statement on Sunday, which removed the latest e-mail cloud over HRC’s head, was perfectly timed for the S&P 500 to rebound from its 200-day moving average, which was hit last Friday (Fig. 2).
On the other hand, bond yields edged up over the past couple of days (Fig. 3). The US Treasury 10-year yield is actually up from this year’s record low of 1.37% on July 8 to 1.88% yesterday. The bond market has been less concerned about how Americans will vote than when the members of the FOMC will vote on the next rate hike. The widespread expectation now is that the Fed’s monetary policy committee will hike the federal funds rate from a range of 25-50bps to a range of 50-75bps at the December 13-14 meeting of the FOMC. Interestingly, the spread between the 12-months-ahead fed funds rate futures and the nearby contract is 22bps, suggesting that the market isn’t expecting another rate hike after December for quite a while (Fig. 4).
The bond market seems to have bought into our one-and-done-per-year scenario. Fed officials have been saying that their rate hiking will be gradual. The pace of normalizing monetary policy will be abnormally slow. Recall that the previous period of normalization occurred from June 30, 2004 to June 29, 2006, when the federal funds rate was raised by 25bps during 17 consecutive FOMC meetings from 1.00% to 5.25% (Fig. 5)!
Fed officials seem to be paying more attention to the spread between the federal funds rate and the real interest rate, which they call “r-star” (r*). The problem is that r* is hard to measure since it is supposed to be the difference between the nominal interest rate and long-term inflation expectations. Measuring the latter variable is easier said than done. There are a couple of measures of 10-year inflation expectations based on the yield spread between the nominal Treasury bond and the comparable TIPS, and also a measure based on a survey of economists (Fig. 6 and Fig. 7). They both tend to be quite close to the actual current core CPI inflation rate. We will use the survey data as our measure of long-term inflation expectations.
Obviously, it makes no sense to subtract inflation from the overnight federal funds rate to derive r*. Instead, we derive the real rate as the 10-year bond yield minus the survey-derived measure of inflation expectations over the next 10 years (Fig. 8). If this is a measure of r*, then it certainly isn’t stable. It has been trending downwards in a volatile fashion since the early 1980s, from 8% to about zero now.
Fed officials seem to agree that r* is down to zero. They conclude that unless it moves higher, then they may not have to increase the nominal federal funds rate much to normalize monetary policy. I look at the same relationship between the real rate and the nominal fed funds rate and wonder whether the Fed’s ultra-easy monetary policies might explain why the real rate is so low. In any event, it’s their view that matters.
US Consumer: Saving More Before Retiring. Personal saving has risen significantly since the financial crisis of 2008. This is one of the reasons why the economic expansion has been sub-par. It also has been a source of frustration for Fed officials. Despite their efforts to stimulate spending, the level of personal saving and the personal saving rate have been elevated in the years following the 2008 recession.
Why are they so high? Are all income groups saving more or just the ones with the highest incomes? Melissa and I reviewed some of the available data. We found that the saving rate increased across most income groups after the crisis, though the rate for each of those groups then decreased some from their post-crisis peaks. It makes sense that risk-averse consumers might have turned even more so after the crisis.
Another reason for the higher saving rate is that the population is aging. The data confirm that the personal saving rate tends to be the highest for pre-retirees. That age group also tends to have the highest after-tax incomes. This is yet another example of how an aging population tends to weigh on economic growth.
Consider the following:
(1) Personal saving overall. From the start of the 1990s until the start of 2009, the 12-month sum of personal saving averaged $357 billion annually. From then until September 2016, it averaged much higher at $724 billion (Fig. 9). Over about the past decade, the personal saving rate has increased by 3.3 percentage points. Its 12-month moving average hit a record low of 2.6% at the end of 2005. It increased to 5.9% by September 2016 on a seasonally adjusted basis (Fig. 10).
(2) Drilling down. Now let’s look at personal saving rates at a more granular level, specifically by age and income. We can calculate such disaggregated saving rates using annual after-tax income (including tax credits) minus total expenditures (including food, housing, transportation, health care, contributions towards insurance and pensions, and other nonessential expenditures) as a percentage of after-tax income. The data are available from the Bureau of Labor Statistics’ (BLS) Consumer Expenditure Survey (CE) and are reflected as averages for various demographic groups per consumer unit, the definition of which can be found within the CE glossary. The resulting measure isn’t perfect, nor is it directly comparable to the aggregate savings rate calculated by the Bureau of Economic Analysis (BEA).
Nevertheless, the average aggregate saving rate from 2008-2015 was higher than during the period from 2000-2007 for both measures. For the CE measure based on all consumer units, the annual average from 2000-2007 was 14.9%. It rose to 15.2% for 2008-2015. The BEA’s monthly seasonally adjusted personal saving rate averaged 4.0% over the earlier period as compared to 5.8% over the latter.
However, the CE measure peaked during 2010, which was much sooner than the BEA measure peaked during December 2012. The former also declined substantially more than the latter from its peak through 2015. Apples and oranges aside, the CE provides a directional view of disaggregated saving behavior.
(3) Higher income, higher saving. Relative to one another, the granular saving rates fell into logical order for all the years we examined from 2000-2015. For 2015, the rate for the highest income quintile was 22.4%, followed by the fourth at 12.0% and the third at 1.9%. The 2015 rate for the second to lowest- and lowest-income quintiles both were negative--the lowest-quintile rate substantially more so. Also notable, the 2015 rate for the highest income quintile was nearly double the rate for the second-highest income quintile (Fig. 11 and Fig. 12).
(4) More saving for most. Similar to the aggregate view, the granular saving rate was higher for the highest four income quintiles when averaged annually for the period from 2008-2015 as compared to 2000-2007. Over the same time periods, the rate for the highest income quintile increased by the least on a percentage point basis (1.0ppt) followed by the fourth (3.3), third (4.5), and second (6.4). In other words, the saving rate increased more for the lower income quintiles (except the lowest one) following the crisis.
In dollar terms, however, a percentage point change obviously equates to more at higher income levels. Based on the CE, for example, average after-tax income for the highest income quintile was $142,446 in 2015. That was nearly double the second-highest income quintile at $72,375.
The lowest income quintile stood on its own. That group’s saving rate dropped further negative following the crisis. In other words, the group spent further beyond its means.
(5) Saving highest in mid-life. The picture by age group is somewhat difficult to clearly see given the available breakdown, because people aged 55 to 64 are lumped together in the CE. With the minimum retirement age to collect Social Security set at 62, some retirees might be included in that broader grouping.
Nevertheless, the data helpfully confirm that the age group gearing up for retirement (45 to 54) had the highest saving rate, at 12.6% in 2015 (Fig. 13 and Fig. 14). If the 55 to 64 age group were tweaked to be 55 to 60 or 61, chances are the rate would meet or beat that of the cohort just behind.
The data also show that the youngest (aged under 25 and 25 to 34) and oldest (aged 65 and over) cohorts tend to have lower saving rates than the other mid-life age groups. It’s no surprise that the youngest and oldest age groups also tend to have lower after-tax income than those in the middle based on the CE (Fig. 15).
(6) Aging factor. To conclude, the aggregate personal saving rate increased during the period following the crisis. And that occurred across all income quintiles (excluding the lowest one, which has the least ability to save after necessary expenses). As we explored in detail in our 11/2 Morning Briefing, the population is rapidly aging. The Baby Boomers are currently aged 52 to 70, according to the Census Bureau. Many of them are in that pre-retirement sweet spot when the saving rate and level of after-tax income tends to be the highest. It follows that the age factor likely has played a large part in the increase in the aggregate saving rate.
Dr. Ed Yardeni is the President of Yardeni Research, Inc., a provider of independent global investment strategy research.
© 2022 Newsmax Finance. All rights reserved.