No savings incentive

Data released this week has provided further evidence that households are still suffering from the current financial and economic crisis. In fact, given that non financial companies have yet to announce significant reductions in headcounts, unemployment is poised to rise. That will have an immediate impact on personal consumption which is already decreasing year over year and running at a worse than expected deficit (see the chart below). Household spending represents roughly two thirds of U.S. GDP.

If people are becoming risk averse and if consumption is slowing, one would expect savings to increase. However, this is being undermined by a perverse effect which is emerging from the FED's monetary response to the current crisis. In its efforts to provide liquidity and enhance interbank lending, the FED has lowered interest rates to 1%. That is below the official inflation rate released today that put the Personal Consumption Expenditures index core rate at a solid 2.9% year over year. Hence, in face of negative real interest rates, there's no economic incentive to save. Below you will find the inflation chart.