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By New_Deal_democrat August 8, 2017 9:09 am
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A noisy long leading indicator turns negative
There is a variety of economic commentators I call Doomers.  They haven't seen a single piece of positive news for the entire duration of the eight year expansion. Everything is always on the cusp of imploding or crashing. Because of their strong point of view, and because of confirmation bias, they attract a loyal -- and far larger than warranted -- following.
 
The more garden variety type of Doomer is just good for an eyeroll or a chuckle. The Baltic Dry Index is going down: it's crashing! The Baltic Dry Index goes up: silence. The inventory to sales ratio goes up: it's a recession! The inventory to sales ratio goes down: silence. And so on.
 
But a few of them I follow because they find interesting and useful data sources, and/or dig down into the data. Just as an example, even if I don't think real estate is crashing, the monthly Zumper rental index is a find, because although it isn't seasonally adjusted, it is much more timely than the quarterly report on median asking rent. 
 
And every now and then, as the saying goes, even a blind squirrel finds a nut.
 
So it is with the personal savings rate.
 
Here's how I described the record of the personal savings rate, normed by inflation, back in 2012:
 
"Notice that the real personal savings rate declines by at least 5% in advance of every recession, with the decline frequently beginning at least 2 years before the start of the next recession, and usually reaching the 5% mark before the recession's onset, or at least early into the recession. Furthermore, the indicator appears to have no false positives, i.e., every time the real personal savings rate has declined 5% or more, a recession has occurred. Finally, in all but two of those occasions, the real personal savings rate turned negative, at least briefly."

Here's a long term graph of the real and nominal personal savings rate through 2012:

 

I haven't covered this indicator in awhile, because as I also noted in that same article, it is very noisy.  I also wasn't sure how much of the change was really due to a surge in inflation (thus lowering the savings rate), so I wasn't sure how much new information it was providing.

 
Anyway, last week Societe Generale's Albert Edwards trumpeted recent revisions by the BEA that resulted in a downward revision of the personal saving rate by over 2%. So I went and re-checked the data, and lo and behold, he was onto something.  Here is both the real and nominal savings rate data for the last 5 years:
 
 
With the BEA revisions, we do indeed have a decline of over 2% in the nominal personal savings rate, and 5% in the real one.
 
I think there is a behavioral explanation for this, in which as an expansion progresses, consumers are willing to go out more on a limb with their personal finances. Then, when something adverse happens, the shock absorber has been removed, and consumers begin to rebuild their balance sheets, enabling a recession.
 
I don't see this as portending anything imminent. Rather, it is one more piece of evidence that crops up at mid-point or later in an expansion, laying the groundwork for an eventual downturn.
 
But that's a big reason I read Doomers.  Every now and then in their eternal quest for portents of Doom, they find something that is worth considering.
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