Optical illusion

Spare a thought for economic forecasters. It’s a tricky balance to give an economic outlook with a conviction greater than merely saying forecasting is impossible while recognising that some of the pillars supporting the view could get revised away.

However, it is important to know which parts of the narrative are potentially more vulnerable than others. Recently, one of most notorious has been the US excess saving debate. During the pandemic households accumulated excess saving due to huge transfers from government and an inability to spend them while social distancing. One story we heard based on Fed research was that households had now exhausted this excess saving and were on the brink of being forced to pull back sharply.

At the end of September the US national accounts were revised back five years in the annual benchmarking (last year went even further back). These annual revisions can alter the way economists think about the health of the private sector and the potential longevity of the economic cycle. 

Within these changes, the saving rate is especially prone to large revision because it is the residual between consumer spending and personal disposable income. It also forms the basis for excess saving calculations.

The revisions

Ahead of the revisions, there was an expectation that expenditure GDP (the widely reported growth data) was at risk of a downward revision because an alternative measure of the economy, gross domestic income (GDI) had been growing much more slowly. Most of the confidence and sentiment surveys seemed consistent with the weaker GDI. Instead, not only was GDP revised up 0.2ppt a year over the period 2019-2023, but GDI was revised significantly higher to close the gap between the two measures.

The two main components of GDI are profits and household income. The statisticians found plenty more of each. Within household income, there were upward revisions to wages and salaries, interest, dividends and transfer payments received.

Stronger disposable income alongside only marginally higher consumption has led to upward revisions to the saving rate. Instead of consumer spending growing at a greater pace than income (which would eventually be unsustainable), the saving rate now appears steady over the last 18 months. A higher level of savings changes the calculation around excess saving as the rundown appears less rapid. Furthermore, there are reasons to expect additional upward revisions to saving in future based on historical precedent and the potential for interest income to be revised even higher.

Overall, the consumer now looks less stretched (especially when taking into account the rapid rise in wealth since the pandemic). The corporate sector also appears in a stronger position with margins now higher and relatively stable (and more consistent with listed company earnings). As a result, we believe the pressure for retrenchment from either side has diminished, raising the probability of a soft landing. 

However, while the chances of a soft landing in the US appear to have improved, it’s important to remain cautious. Just because progress has been made doesn’t mean it’s guaranteed. Reflecting on some of the signposts we identified six months ago, some crucial factors are still lacking. European growth data continues to look uninspiring, while liquidity in the US housing market remains constrained. Additionally, though delinquencies and bankruptcies in the US are still relatively contained, they are ticking marginally higher rather than lower. These developments remind us that the path forward is not without its risks.