'Torture numbers, and they'll confess to anything'  Gregg Easterbrook

Today's announcement that the US savings rate has hit 6.9%, the highest in 15 years (albeit boosted by transfer payments), confirms my view that we are seeing a huge cultural shift in US consumer behaviour. One of the mysteries of the slump has been how international trade volumes have collapsed far faster than reported growth would imply, and that would be explained in part if US consumer spending had been even higher in the boom years than officially reported, and thus the retrenchment as cash savings soared has sent shock waves across Asian and European exporters. Are US personal savings even higher than the 6.9% annualized rate reported for May by the BEA? The circumstantial evidence certainly suggests as much, notably the relative ease with which the Treasury is funding deficits despite a marked loss of foreign interest beyond the very short duration market. The reported personal savings rate would finance a $600bn deficit, plus another $400bn from the corporate sector, leaving about $800bn to be funded by foreign central banks and private buyers. But if personal savings are already at the levels I forecast last Autumn in the high single digits, it suggests that the pressure to attract foreign capital flows is not as great as markets currently assume. Between 2000 to 2007 US consumer debt grew as much relative to income as in the previous 25 years, and that huge leverage is now being unwound, which will be the key global economic trend in coming years.

Each percentage point on the savings rate translates into about $100bn flowing into the financial system to be invested. I've maintained that a key impact of the crash of 2008 would be to make the US more financially self-sufficient, particularly as the trade deficit evaporated with lower consumer spending. The Bureau of Economic Analysis (BEA) will revise its savings estimate in July, and given the radical shift in consumer behaviour amid historic wealth destruction, I think it's very likely the numbers have understated the scale of rediscovered US thrift (particularly as the BEA is redefining consumer spending categories). At the same time, the BEA also will release revised estimates of the complete set of GDP accounts back to 1998. It makes these massive revisions every five years or so in what it calls a ‘comprehensive revision.’ 

Economics isn't an objective discipline like engineering or medicine, with strictly observable facts and the means to collect them reliably, as so much data is based on very imprecise inference via survey. That's why the timing of recessions and the economic cycle is subject to huge lags and revisions. These revisions can often substantially rewrite economic history, notably in relation to GDP growth and the savings rate.  Come July, we may see things in a very different light. The implications of a higher savings rate are that the US fiscal deficit should be easier to finance domestically, and that the trade deficit will continue to shrink because consumer spending has fallen even more than thought from the peak and likely to stay there. That is bond and dollar positive, but bad news for Asian exporters in that the slump in trade volumes isn't exaggerated after all, but reflects a permanent shift in US consumer behaviour.