A few weeks ago, I reviewed preliminary reports on first-quarter growth in the U.S. economy. The news was grim: annualized shrinkage of 0.7%. “The economy has now contracted in three separate quarters since the recession ended in mid-2009,” The Wall Street Journal intoned, “a series of disappointments unmatched since the expansions of the 1950s.”
Among the weak spots: “Household spending on long-lasting manufactured items was the weakest in nearly four years.”* In other words, we’re not spending enough. (The preliminary estimate was later revised upward, to shrinkage of 0.2%.)
I poured myself a cup of coffee and walked to the mailroom. Maybe it was time to replace my stainless-steel refrigerator with the ungainly dent in the door. Or maybe it was time to replace the avocado-green tile and Eisenhower-era fixtures in my kids’ bathroom. Would that help the U.S. economy?
In the mailroom, I found the recently published How America Saves 2015, our annual report on more than 3.9 million participants in retirement plans administered by Vanguard. I love this report. How America Saves paints a comprehensive picture of the behaviors and retirement readiness of Americans like me who save for retirement through defined contribution plans.
The news was not grim, but it was not especially uplifting. In 2014, retirement plan participants saved, on average, 10.4% of their income, including both employee and employer contributions. That’s below our recommended target of 12% to 15% of income. In other words, we’re not saving enough.
I started to twitch. We’re not spending enough, and we’re not saving enough. I hustled back to my desk and emailed our economists. Their reply was terse: “Y = C + I + G + NX.” I stopped shaking.
Two pieces of the same pie
The value of an economy’s output (Y, or GDP) is equal to what we spend on consumption (C), what we invest in new plants and equipment (I), what the government spends (G), and the value of the economy’s net exports (NX). This mathematical identity had a soothing effect. The fate of our economy didn’t depend on saving or spending. It depended on both.
When we shift some economic activity from current consumption to investment, we move dollars from one input to another. There is no net reduction in economic activity. And if what we save today is channeled into better tools and equipment and better infrastructure, we retirement savers get a three-fer. We enhance our chances of financial security, we contribute to current economic activity, and we underwrite investments that may enhance economic productivity and, ultimately, our standard of living.
Control what you can
I’m occasionally confused by the seeming tension between my different economic roles as a consumer and investor. The formula above describing the composition of our economic output reminds me that the tension may not be as sharp as news accounts suggest. And I ultimately return to a principle that has served me and all Vanguard shareholders well as we live our economic lives: Control what you can, whether it’s the costs of your investment program, the risk profile of your portfolio, or how much you set aside today for future goals.
*Wall Street Journal article, May 29, 2015