The following comes from the analysts at Annaly Capital Management:
For this, the last Salvo of 2009, and just in time for the holiday shopping season, we thought we’d look at a somewhat wonkish metric of consumer spending that we’ve been kicking around. We start with Milton Friedman’s permanent income hypothesis, that says people tend to spend what they consider to be permanent income, and any temporary windfalls (lottery winnings, inheritance, checks from the government) will be disproportionately saved. In general, we believe it to be true. However, something appears to be changing.
We’ve been looking closely at spending and income, particularly the portion of real personal income that is derived from government transfer receipts. These transfers consist of social security and unemployment benefits, but also the kind of one-time government payments that have become more commonplace in the last few years (stimulus checks, etc). As you can see below, transfer payments have been growing in absolute terms (nearly $2 trillion) and as a percentage of real personal income (right at 18%) for as long as the BEA has been measuring.
This shouldn’t be too shocking, as the percentage of the population that is collecting Social Security is rising, as is the proportion of the work force that is drawing unemployment benefits. But the chart that we found a little disturbing is the following one: Real Personal Income before Government Transfer Receipts minus Real Personal Consumption Expenditures. Call it Real ExTran Personal Savings for lack of a cooler acronym.
In short, we are spending our transfer payments for the first time on record. The above metric went negative in February of 2009. From 1959 through early 1990, the ratio of Real ExTran Personal Savings to Real Personal Income stayed between 10% to 16%. The 1990s ushered in 20 years of decline in this ratio, until we get to our current ratio of -2.4%. It reminds us of when the personal savings rate dropped below zero for the first time.
America’s proclivity to spend apparently extends beyond Professor Friedman’s measure of “permanent income.” We are curious what is driving this trend-overconsumption or under-earning. Either way, transfer payments are meant to cushion hard times such as these, but this appears to have been a secular trend.