Savings at 24-Year High Means Lasting Recovery for McCaughan

By Lynn Thomasson

Oct. 5 (Bloomberg) -- The U.S. economy’s recovery from its worst recession since the 1930s will be helped as savings climb to the highest level in 24 years, according to Jim McCaughan, the chief executive officer of Principal Global Investors.

Americans will keep up to 9 percent of their disposable income in the bank, the most since 1985, said McCaughan, who oversees $201 billion, in an Oct. 2 interview. While less spending will cut U.S. growth and profits at retailers, it will make the expansion last longer by reducing household debt and the nation’s trade deficit, he said.

“You’re going to see a pretty tepid recovery,” McCaughan said in New York. “You’ll have a less leveraged personal sector and financial sector. You’ll get growth. It won’t be 5 percent, it will be 2 percent. That isn’t so bad.”

The outlook echoes predictions from Richard Clarida of Newport Beach, California-based Pacific Investment Management Co. and Gary Shilling, president of A. Gary Shilling & Co. in Springfield, New Jersey. Clarida, whose firm runs the world’s largest bond fund, estimated the savings rate may exceed 8 percent. Shilling said Americans are on a decade-long “savings spree” that will restrain the economy. Both spoke in Bloomberg Radio interviews last month.

Consumers lost $9.67 trillion of wealth last year as the housing bubble burst and the Standard & Poor’s 500 Index fell 38 percent, the most since 1937. The declines spurred them to push savings up to 5.9 percent in May, the highest since 1998. The rate slid to 3 percent in August, above the three-year low of 0.8 percent in April 2008, Commerce Department data show.

Belt Tightening

Only 8 percent of U.S. adults plan to increase household spending, almost one-third will spend less, and 58 percent expect to “stay the course,” according to a Bloomberg News poll from Sept. 17. More than three in four adults said they reduced spending in the past year, the survey showed.

Best Buy Co., the largest electronics retailer, said profit during the three-month period that ended Aug. 29 fell 22 percent as sales of digital cameras, video games and DVDs dropped. The Richfield, Minnesota-based company reported record sales of $45 billion in the fiscal year ended in February.

“You need a more balanced economy,” McCaughan said. “Consumer spending got to 70 percent of the U.S. economy. That’s actually unsustainable.”

The median economist surveyed last month by Bloomberg forecast U.S. growth of 2.4 percent next year and 2.9 percent in 2011. That compares with the gross domestic product expansion that exceeded 3 percent in 2004 and 2005 as consumers used cash extracted from their real-estate holdings to fuel spending.

More Failures

McCaughan predicted more failures at smaller banks as they struggle with mounting losses on real-estate loans. Larger lenders have been strengthened by government cash infusions, he added. Almost 100 U.S. banks have collapsed this year, the most since the savings-and-loans crisis of the early 1990s.

“There will be more land mines” in regional lenders, McCaughan said. “The large U.S. banks have been very good at being transparent. They’ve raised a lot of capital, so I think they’re in fundamentally quite a strong position.”

Principal Financial Group Inc., the asset manager’s Des Moines, Iowa-based corporate parent, is issuing more commercial mortgages and expects “good returns” following almost two years of reduced lending, McCaughan said.

“There’s opportunity in commercial real estate,” he said. “But there’s not a rush to get in.”

To contact the reporter on this story: Lynn Thomasson in New York at lthomasson@bloomberg.net.