ECONOMETER

Headlines at the end of last week screamed with the news that the US household savings rate jumped to 6.9% its highest level in more than 15 years.  Moreover, this percentage looks set to move even higher over coming months. This is good news for an eventual correction in global imbalances given the recent history of US consumers spending more than their means whilst acting as a major source of demand for Asian exports.  

Higher US savings, less reliance on exports in Asia as well as stronger Asian currencies against the US dollar will clearly be needed to result in an eventual global rebalancing.   However, rising savings is bad news for the US economy in the next few months. More savings means less spending and therefore a smaller contribution from the US consumer to the economic recovery. Weaker spending will have major implications given that private consumption makes up around 70% of US GDP. In comparison, private consumption accounts for only around half as much of GDP in China.

Weak US consumption is also bad for the rest of the world especially for the export led economies in Asia and highlights further the likely slow pace of global economic recovery.   Asia for its part is attempting to shift growth from being export led to domestic spending and there are signs that this is showing some results, especially in China but there is a long way to go. 

An increase in the US savings rate is by no means surprising given the headwinds on the US consumer from rising unemployment; data this week is likely to show the unemployment rate pushing ever closer to 10%. Additionally a massive drop in household wealth which has dropped by almost $14 trillion since the spring of 2007 will clearly play negatively on spending.

Weak spending has resulted in a drop in demand for loans but the supply of loans has also tightened as banks faced with deteriorating balance sheets tighten lending conditions. The latest Fed loan officers’ survey showed some improvement but lending standards remain tight. Taking these factors together it highlights the risk that the US economy may not stand on its own legs once the impact of the government’s fiscal stimulus wanes.

What does this mean for the dollar?  In the short term it means very little as FX markets are not particularly reactive to this data.   Further out, in theory it is better news for the dollar.  Higher savings/less spending filter into lower imports and a reduction in the trade and current account deficits.    The current account deficit in Q1 2009 was over a third smaller than the deficit in the previous quarter and the trend is for a further narrowing over coming months; it is likely to be around 3 to 3.5% of GDP over the next couple of years.  

This is good news for the dollar in that there will be less need for foreign money to finance the current account deficit but given that the overwelming concern at present appears to revolve around the dollar’s reserve status, I would not rush to buy dollars in a hurry.   In any case, it’s been many years since the dollar has reacted to US trade and current account data releases and I doubt this is about to change.