Question of the Month

by Admin 21. December 2009

We have received a lot of questions from our customers, friends and associates lately on what will happen to housing prices in the new year.  We could do research, however, any of our comments would be pure speculation.  Instead, we would prefer to hear your thoughts and opinions. 

Use the comment feature below to post your perspective.  We are interested in what you have to say.


Financial Crisis = the Opportunity for Positive Change

by Admin 17. December 2009

For those of you that know me, you know that I am a big fan of the TED talks. If you don't know me and you're not familiar with what TED is, I'll explain... Um, or at least wikipedia will explain:

TED (Technology, Entertainment, Design) is an academic organization owned by The Sapling Foundation, a private nonprofit foundation. TED is well-known for its annual, invitation-only conference devoted to "ideas worth spreading" and for its lectures, known as TED Talks, which originally focused on technology, entertainment and design, but have now expanded in scope to a broad set of topics including science, arts, politics, education, culture, business, global issues, technology and development.

So, basically TED helps spread new ideas and concepts by having the large TED talks and then more localized TEDx events which, I might add, was recently here in Baltimore at MICA called TEDxMidAtlantic. Needless to say, these talks never cease to amaze me and provide a great resource to evaluate our world from alternative point-of-views. This brings me to the point of this post...

This past year has been rough...very rough, and quite frankly, I'm tired of all the negativity. Right now, with the year coming to a close, I'd rather examine what good will come from the lessons learned. How will consumers and society as a whole evolve from the "Great Recession?" Well, John Gerzema recently gave a TED talk on "The post-crisis consumer" which answers those very questions. Take a look and let me know what you think and what your thoughts are in the comments section.


Are We Born-Again Savers?

by Admin 17. November 2009

Are Americans maintaining their new focus on increasing savings while lowering debt? Some economists think we'll keep increasing personal savings to a rate of about 8% of our after-tax personal income - consider that we haven't seen a rate like that since the early 90's (see graph below). However, in August, the personal savings rate fell for the third month in a row to 3% of disposable income as reported by the Commerce Department on October 1st.

U.S. Department of Commerce: Bureau of Economic Analysis: Personal Savings Rate Graph

Over the past several weeks there have been a large number of discussions and questions about the Savings Rate from both employees and customers which has prompted 1st Mariner Bank's Treasury Department to do some additional research. They have recently completed a White Paper on Personal Savings with focus on the Savings Rate to explain how it's calculated, what it means, what it predicts, and where it's going. Below is a rough version that highlights some of the main points of the White Paper. Be sure to send us any comments, questions, or feedback by using the comment feature at the bottom of this post.

What influences the saving rate? Before looking at what influences the saving rate, it helps to understand what makes up personal saving. So, first, what is personal saving and how is the personal saving rate computed?

The Personal Saving Rate (PSR) is the fraction of personal income that is not consumed. It represents personal discretionary income less personal consumption expenditures as a percent of personal disposable income.

Personal income measures income from employment, self-employment, investment income, dividends, and transfer payments such as Social Security. Income from wages is the largest component.

Total personal income is defined by the United States' Bureau of Economic Analysis as income received by persons from all sources. It includes income received from participation in production as well as from government and business transfer payments. It is the sum of compensation of employees (received), supplements to wages and salaries, proprietors' income with inventory valuation adjustment and capital consumption adjustment, rental income of persons with capital consumption adjustment (CCAdj), personal income receipts on assets, and personal current transfer receipts, less contributions for government social insurance.

Disposable income is gross income minus income tax on that income. In national accounts definitions, personal income, minus personal current taxes equals disposable personal income. Subtracting personal outlays (which includes the major category of personal (or, private) consumption expenditure), personal interest payments and personal current transfer payments to government and the rest of the world (donations, fees, and fines paid to Federal, state, and local governments) yields personal (or, private) savings.

Personal Consumption Expenditures (PCE) represent the actual and imputed expenditures of households and includes personal outlays for durable and non-durable goods, and services. It is essentially a measure of goods and services targeted towards individuals and consumed by individuals.

So the formulas for personal savings and the savings rate look something like this:

Personal Income

  • + Wages and salaries
  • + Supplements to wages and salaries (employer contributions for person, insurance and government social insurance)
  • + Proprietors’ income with inventory valuation and capital consumption adjustments
  • + Rental income of persons with capital consumptions adjustment
  • + Personal income receipts on assets (interest and dividend income)
  • + Personal transfer receipts (government social benefits)
  • - Less: contributions for government insurance
  • = Total Personal Income
  • - Minus: Personal current taxes
  • = Disposable Personal Income


Personal Outlays

  • + Personal consumption expenditures
  • + Personal interest payments
  • + Personal current transfer payments to government and the rest of the world
  • = Personal Savings and

The Personal Savings Rate = Personal Savings / Disposable Personal Income

Therefore, some of the factors that influence the savings rate include:
(as they relate to Disposable Personal Income)

  1. Changes in personal income (i.e. wages) and the growth rate of personal income
  2. Changes in interest rates, which affect investment income
  3. Changes in corporate profits, which impact dividend payout rates
  4. Changes in tax rates

And on the outlay side:

  1. Increases or decreases in personal consumption expenditures,
  2. Changes in interest rates and their impact on interest payments
  3. Changes in current transfer payments.

Arguably, the two most important factors influencing the savings rate are personal wages and salaries, and the rate of personal consumption.

What has been the trend with Americans and saving over the past 50 years?

In terms of absolute dollars, savings have generally increased over the last 50 years with the exception of the last 10 years. However in terms of the saving rate (% of disposable income saved) personal saving has been on the decline up until the past year.

Source: U.S. Department of Commerce: Bureau of Economic Analysis

Source: U.S. Department of Commerce: Bureau of Economic Analysis

Going back even further you can see that since WW II, saving generally rose through the mid 70’s and then began a long period of decline over the next 30+ years.

Personal Saving as a Percentage of Disposable Personal Income

The saving rate actually went negative during the Depression as households used savings as supplemental income. And the saving rate rose to over 25% during WWII.

There is a long period of a rising saving rate (from after WWII to 1974) and a long period of a declining saving rate (from 1975 to 2008). Some of the change in the saving rate was related to demographics. As the baby boomers entered the work force in the mid '70s, the savings rate declined as younger families typically save less.

However with the baby boom generation starting to enter their peak savings years (the boomers will start reaching their mid-60s in the next decade and beyond), many expect the saving rate will continue to rise (an aging population usually pushes the saving rate higher) and will do so at the expense of personal consumption.

Source: The Administration on Aging (AoA)

Source: The Administration on Aging (AoA)

So, for instance, if the saving rate rises to 8% by the end of 2010, as Pacific Investment Management Co (PIMCO) strategic adviser Richard Clarida expects, this suggests that real PCE growth will be about 1% below trend per year.

So with wages barely rising, and a rising saving rate suppressing PCE, many expect PCE growth to be sluggish for some time. And since PCE is usually one of the engines of recovery (along with residential investment), the economic recovery may be very sluggish as PCE accounts for roughly 2/3rds of total GDP.

Annual Chang in Real PCE vs. Change in Personal Saving Rate

The R-squared here is only .125, so there are other factors impacting PCE (like changes in income!).

But a rising saving rate does seem to suppress PCE (as expected). If the saving rate rises to 8% by the end of 2010 (as PIMCO expects), this suggests that real PCE growth will be about 1% below trend per year.

Source: Alan Greenspan and James Kennedy, Federal Reserve Board FEDS working paper no. 2005-41.

The Easing of Credit:

Some argue that the easing of credit availability that began in the 1980’s fostered in an era of lower saving rates. Financial disintermediation, which occurs when funds move out of savings banks and into short-term investments with higher interest-rate yields and asset securitization ushered in a period of rapid growth in consumer debt and coincided with a decline in personal saving. Likewise, the rise in residential real estate values in the 1990’s resulted in a sense of increased personal wealth, which further weakened the argument for the need for higher personal saving. Unfortunately, these paper housing profits were withdrawn by individuals in the form of mortgage equity withdrawals and further increased the debt burden on individual consumers.

Active Mortgage Equity Withdrawal Debt-to-Growth Ratio

The dramatic downshift in the economy found many Americans without a ‘rainy day’ fund. Millions of Americans lost their jobs and saw their 401(k) wiped out. It is unsurprising then to see that the trend of personal savings rate has been on a fast-pace decline since the mid 1980’s, reaching decade-low levels in recent years. The following graphic shows the trend of the personal savings rate per month from 1959 to 2009, along with an alarmingly opposing trend of rising consumer debt.

Dude, Where Did My Savings Go?Personal savings rate is a key measurement of the amount of resources American households have available to contribute to the national saving. A low personal saving rate limits how much the nation can invest and so ultimately limits future economic growth.

As you look at the graph above, consider this: personal savings rate also correlates with Americans’ ability to sustain their rate of spending. Because personal spending represents about two-thirds of the U.S. economy, a low personal savings rate raises questions about whether Americans have adequate resources to withstand a financial emergency such as unemployment in the event of an economic downturn.

Despite the downward trend of personal savings rate in America, a change in money mindset has emerged from this recession. The personal savings rate has climbed to its highest level in the past 15 years, while U.S. consumer’s outstanding credit plunged in recent months. Having directly seen the impact of facing a recession without a cushion, many Americans are becoming thriftier and savvier in managing their money.

Considering the catalyst of this report was your questions and discussions with Mariners, we would like to continue this conversation. Please use the comments section below to ask questions, make a statement, or give some of your own personal insight. Basically, we want to hear what you have to say.

© 2008- 1st Mariner Bank