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Economic News, Data and Analysis

Whats up (down) with the savings rate?

The personal savings rate in the US has been falling steadily over the
past several years; and, recently, it has even dipped below zero. (See
graphs). This overall long-term trend has been a bit worrisome to many
economists, but it is the most recent part of the trend that leaves many
of us scratching our heads as to why the rate has taken such a dramatic
dive since it’s local peak in 1992.

Here’s my list of possibilities.



Credit cards have become more common.

In econospeak the we say that the “liquidity constraints” are looser.
The argument goes that 20 or 30 years ago people with little or no savings
would have liked to have spent more, but couldn’t go into debt. The ubiquitous
credit card has made this easier to do today. The growth of personal debt
seems to be the other side of the coin.

Stock market is booming.

With a booming stock market, those people lucky (or smart) enough to
have put money into the market have seen their net worth rise at phenomenal
rates. These people are thus wealthier and are spending a portion of this
accumulated wealth. The measured savings rate compares savings to current
income – missing this “wealth effect”. (Savings out of total income – including
the change in asset values – could remain the same, while measured savings
would decline).

People are expecting higher incomes in the future.

The decision to save is a decision of how to allocate spending over
time; therefore, what people expect to happen in the future will impact
how they behave today. If you win the lottery today, chances are you will
start spending before the check arrives in the mail. If people are expecting
the economy to keep booming, and bring with it a higher paycheck or bonus
at the end of the year, they won’t necessarily wait to go out and splurge
on that new DVD player today. Since their current income hasn’t
changed, and spending has increased, the savings rate will dip.

People are expecting higher prices in the future.

It’s hard to watch any economic or financial market news these days
without hearing worries about increasing inflation. If consumers are thinking
that prices might start to increase soon, they’ll go out and buy that Ford
today while they think the prices are still low. (Creating expected inflation
is what some
are arguing
Japan needs to do to get out of their slump; maybe they
should follow our example.) This shift in consumption from the future to
the present will lower savings rates (but will increase them down the road).

People are expecting higher interest rates.

If the prospect of higher inflation is giving Alan Greenspan the jitters,
consumers may worry that interest rates may go up in the future. This would
give people an incentive to purchase those big item purchases now in order
to lock in low interest rates. Again, this would shift purchases from the
future to the present.

Simple demographics

Grandma spends much more than she earns. As the population ages, the
number of people who are actively spending down their wealth is increasing.
This is a natural result of the demographic trends in the US.

People are expecting a tax cut

Washington is all a buzz with talk of how to spend the surplus. Tax
cuts are at the top of the Republican agenda, and there doesn’t seem to
be much opposition (provided some of the money is put towards paying down
the debt – i.e. “saving” social security.) Again, if people are expecting
a gift from Washington next April, why not spend some of that now?


What, Me Worry?

It’s hard to get too worked up over the decline in savings rate. Of
the above reasons, 4 predict a rebound after a year or two (the ones that
involve expectations). The credit card trend (which helps magnify the other
causes) has certainly made my life a lot nicer – no complaints here. And
I’m not going to tell Grandma she can’t take that vacation to Florida this

What really matters is the total national savings – personal
savings plus government and corporate savings. Given the reduction in budget
deficits, national savings has been rising from it’s trough of 13.8% in
1992 and is currently around 17% of GDP – a little low, but within the
normal range for the past 20 years or so.


Recent drop, 1992.

The rate was near 10% in 1982, and dropped to around 6% in 1985 holding
steady through 1992. Then the recent falls in the rate began in what appears
to be 1992, an election year. Coincidence? Perhaps having a Democrat elected
to the presidency spurred consumer confidence, or consumer irresponsibility,
depending upon your party affiliation.


Graphics generated with BEA data by the author.

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Filed under: Economy