by Russ Koes­terich, Chief Invest­ment Strate­gist, iShares

Accord­ing to the Com­merce Depart­ment, retail sales rose 0.5% in Octo­ber, higher than the 0.3% econ­o­mists had fore­cast, thanks in part to a large jump in elec­tron­ics pur­chases.

The better-than-expected retail sales fig­ures are the lat­est sign that the US econ­omy is likely to avoid another reces­sion and is expe­ri­enc­ing what I’m call­ing “The Great Idle.” But a look behind the retail num­bers also reveals a major risk fac­ing the US economy.

With unem­ploy­ment still high and wages grow­ing so slowly that hourly work­ers are los­ing pur­chas­ing power at the fastest rate in 20 years, you may be won­der­ing where con­sumers are get­ting the money to buy new cars or the lat­est iPhone.

As I men­tion in my recent Mar­ket Update piece, it turns out that sur­pris­ingly brisk retail spend­ing is being sup­ported by lower sav­ings and by help from the government.

Lower Sav­ings: Despite numer­ous pre­dic­tions of a more fru­gal con­sumer, the US sav­ings rate is once again drop­ping. September’s sav­ings rate was 3.6%, the low­est rate since late 2007. In con­trast, the per­sonal sav­ings rate aver­aged 5.1% in 2009 and 5.3% in 2010. For the time being, con­sumers appear to be main­tain­ing their spend­ing habits by revert­ing back to an old trick: Sav­ing less.

Gov­ern­ment Help: Gov­ern­ment trans­fer pay­ments — such as Social Secu­rity, unem­ploy­ment and dis­abil­ity pay­ments — have spiked in recent years. As I’ve men­tioned before, trans­fer pay­ments now con­sti­tute about 20% of dis­pos­able income and growth in trans­fer pay­ments has been the major fac­tor sup­port­ing income growth. Since the end of 2007, over­all dis­pos­able income has risen by slightly more than $900 bil­lion. Of that $900 bil­lion, more than $550 bil­lion has come from ris­ing trans­fer payments.

Sav­ing less can con­tinue for a while longer, but not indef­i­nitely. More impor­tantly, the US consumer’s reliance on trans­fer pay­ments shows why investors should pay par­tic­u­lar atten­tion to any bud­get cuts that come out of the Con­gres­sional super com­mit­tee nego­ti­a­tions. Any near-term tax increases or reduc­tions in trans­fer pay­ments would hit con­sumers at a dif­fi­cult time and could act as a drag on an already fee­ble expan­sion.

While the cur­rent US fis­cal sit­u­a­tion is also unsus­tain­able, para­dox­i­cally, try­ing to fix it too quickly may raise the odds of another recession.

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