The U.S. GDP data to be released Thursday will nearly certainly lift the voices of those who have been singing that the global economy is chugging along just fine. Expectations are for the third-quarter numbers to be the best so far this year, showing an annualized growth rate of 2 to 2.5 per cent.
That figure, though, requires some explanation.
About half of it probably reflects a rebound in the auto sector, following the Japanese earthquake. It is very likely that this is a non-recurring event.
More difficult to measure is the impact that recent financial shocks have had on the latest quarterly figures.
Economics is a science, but a soft one. At its root is the assessment of human behaviour.
Peoples' response to an economic shock is a nuanced process. In many ways it is similar to the five stages of grief that psychiatrist Elisabeth Kubler-Ross enumerated back in 1969, based on her research with patients facing terminal illness.
The past couple of decades show that consumers initially react to economic malaise by drawing on their savings to maintain living standards. Think of these as the "denial," "anger" and "bargaining" phases of facing unpleasant reality.
In the very early stages of a downturn, people allow their savings rate to decline – families tap their bank accounts so they can continue to go to Applebee's for dinner on Thursdays.
But as the reality of the financial shock sets in months later, the savings rate starts to build. Thursday dinner becomes a bowl of mac and cheese in the kitchen with some private-label ketchup (one squirt for each of the kids; two for dad).
We are still in the early stages of this process. The U.S. personal savings rate fell from 5.3 per cent in June to 4.7 per cent in July to 4.5 per cent in August.
This reduction in savings was key in propelling consumer spending forward. In July, if the savings rate had steadied, real consumer spending would have contracted 0.7 per cent instead of gaining 0.4 per cent. In August, if the savings rate had not declined, real consumption would have contracted 0.1 per cent instead of merely flattening.
For GDP, the drop in the savings rate saved the quarter. But history suggests the salvation is transitory.
Go back to March, 1989, and the savings rate stood at 7.8 per cent. We then endured the credit crunch and housing downturn, and the savings rate fell to 6 per cent as piggy banks were raided to maintain living standards, at least initially. But within a year, the savings rate hit 7.5 per cent and the recession was in full gear.
Savings traced a similar path after the tech wreck. In July, 2000, the savings rate was 3.4 per cent; by December of that year, it was down to 2.1 per cent. As recession set in, the savings rate climbed to nearly 5 per cent within a year.
Then we had the last cycle. The bad stuff in housing and mortgages occurred long before the equity market figured it out. Between March, 2007, and August, 2007, the savings rate dropped to 2.0 per cent from 2.8 per cent.
Once again, the initial response to the shock was to save less from after-tax income. Families figured the downturn would pass and there was no reason to forgo the annual vacation to Scottsdale. But as soon as it became clear that asset values weren't going to bounce back any time soon, the savings rate got as high as 8.3 per cent within the following year.
Even as economic conditions have softened over the past year, households are behaving much like they did in the past – by first drawing down their savings rate to support their lifestyles.
If past is prologue, we would expect the effects of higher saving to kick in as soon the first quarter of 2012 – at which time, the combination of weaker job market conditions and a rising savings rate will conspire to either cause renewed stagnation or outright contraction in real U.S. consumer spending.
In other words, two more stages of grief are still to come. First, depression (in the emotional, not the economic sense, thankfully). Then acceptance of the fact that we are still locked in a downturn that will probably see the U.S. slide into recession next year.
These stages are a natural part of life. Yes, there will eventually be a recovery and the cycle will start again – but it won't happen as soon as this week's figures will have many people think.