It’s a fine day for the pessimists.

Very rarely does the consensus estimate miss the Purchasing Managers’ report by six points, and never in my recollection when it went from even to a pronounced negative.

Purchasing Managers’ % Showing Expansion

The problem is that Americans have not yet begun to save. With the largest retirement wave in history underway (bringing retirees from 19% to 25% of the population by 2020), and an enormous savings deficit, the savings rate has barely climbed up to 5%:

The “normal” rate during the 1970s and 1980s with a much younger population was around 10%. With an aging population, the savings rate should rise markedly; it should rise all the faster given the shock to wealth during the past year; and it should rise even faster given extremely low real returns available on bonds.

The real yield on 10-year Treasuries as measured by inflation-indexed instruments is only 1.5%. The nominal yield on two-year AAA municipal bonds is 0.75%, less than the rate of inflation.

The savings rate will rise to the 10%-15% range. As long as exports contribute marginally to output, the increase in savings must come out of spending. The Red Bull high of government spending won’t last long.

This entry was posted on Wednesday, September 30th, 2009 at 10:33 am and is filed under General. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.