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January 26, 2009

The piggybank effect

During the 2002–2007 economic expansion, the personal savings rate fell to below 1 percent of disposable income. The savings rate had declined steadily from over 12 percent in the 1980s' recession. What changed the way people allocated their budgets?

U.S. household wealth grew considerably as home prices and the stock market soared. According to the Wall Street Journal, "Starting in the late 1990s, soaring stocks made Americans feel richer…. Savings jumped for a bit following the 2001 recession, but plummeted afterwards as housing prices rose, again making Americans feel that it wasn't especially important to save."

Behavioral changes across generations may have also affected the attitude toward savings and debt. A study by McKinsey Global Institute shows that baby boomers' reduced savings is what accounts for most of the collapse in the U.S. household savings rate.

Some have been saying that over the past several years Americans had been "living beyond their means," saving little and shopping conspicuously. According to Merrill Lynch economists, the average household owns nearly $40,000 of nonhousing durable goods assets, a number that has tripled since the mid-1980s.

Since the economy slowed last year, consumers have become more cautious with their income. This fact is not surprising given record lows of consumer confidence, declining house prices, a sharply lower and still volatile stock market, and mounting job losses. Consumers now appear to be shifting toward saving. By November 2008, the personal savings rate rose to 2.8 percent. Many expect it to increase further. According to several forecasters, the savings rate is likely to reach nearly 5 percent by 2011, reducing spending relative to what it had been before the recession.


But what will happen when the economy starts growing again? Will consumers behave the same as in the past, returning to lower savings and higher spending? Or will a more frugal mentality continue?

Some Merrill Lynch economists believe this time the rising savings rate is a secular trend. According to them, attitudes toward spending and debt have changed semi-permanently, and the United States is facing what they term a frugal future. However, Macroeconomic Advisers and Oxford Economics estimate the savings rate will begin to decline somewhat as the economy gathers steam in 2011, although it will still remain higher than in 2005–2007. The forecasters think Americans will save between 2.5 percent to 4.5 percent of their disposable income after this recession runs its course—hardly frugal, but perhaps not "beyond their means."

By Sandra Kollen and Galina Alexeenko, senior economic research analysts at the Atlanta Fed

January 26, 2009 in Business Cycles , Saving, Capital, and Investment | Permalink


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My fear is that this summer, should the cost of gas remain near 2.00, that essential symbol of the American, the SUV, will be back in vogue.

Actually, that is my prediction.

Posted by: esb | January 26, 2009 at 10:01 PM

The Fed's data on consumer purchases of durable goods shows a different picture than the comment implies. The net purchases were around $100 billion in the mid 80s, fell to about $50 after the 90 recession, then rose to about $200 prior to the 01 recession. The interesting part is that it peaked prior to the 01 recession and was very stable until the recent decline. Of course, this only relates to what consumers were spending, it says nothing about their means.

Posted by: Douglas Lee | January 27, 2009 at 11:14 AM

I guess the recession is my fault. My wife and I save about 30% of our income, we have no debt, we rent, and we don't own anywhere close to 40K worth of stuff, durable or otherwise. I'm sorry. Clearly we're failures as American consumers. So we obviously deserve to be punished by having the value of our savings (our work) be destroyed by the Fed's inflationary policies. It's only right that asset prices be propped up by government action. Since the prosperity of the past decade or so was an illusion propped up by debt, the best course of action is to make sure the debt bubble continues to grow. That's the road back to real wealth.

Posted by: Moopheus | January 27, 2009 at 01:30 PM

Why stop at 5%? The Baby Boomers are not going to be able to retire unless they save about the same as people saved in the 70s and 80s which is more like 10%. In fact, one would think that they need to save more like 20% to make up for their lack of savings over the past 10 years.

Posted by: David | January 27, 2009 at 10:43 PM

Does this savings rate include 401Ks? It is only logical for boomers to save to a tax deferred 401k before putting money into taxed time deposits.

Posted by: DR | January 28, 2009 at 10:25 AM

Nice piece, but I'd add two things. First, a lot of US saving shows up as savings by firms, since the tax system discourages distributions of earnings. Since firms are (on the whole) owned by people, it's somewhat misleading to look at personal saving on its own. Second, none of the standard saving rates include capital gains. You hint at this in your piece, but don't explain why, if saving is so low, we have so much net worth. (Less now, of course.) It would be nice to add, for example, a graph of the ratio of household net worth to GDP, or something like that. All of this and more is laid out nicely in a 1999 Brookings article by Gale and Sabelhaus.

Posted by: Dave Backus, NYU | January 29, 2009 at 08:43 AM

In order to compare: What are the saving rates in other countries?

Posted by: martin gale | January 29, 2009 at 09:34 AM

I'd love to see that chart back to fifties, and overlay real (un-Boskinized unhedonized) interest rates against it. Maybe people are more clever than believed.

From a different angle, meaningful modern measures of "savings" should perhaps include some measure home equity, mutual funds, directly-held shares, annuity and insurance-wrapped products, PV of defined benefit plans, and as DR points out 401k and defined contributions plans. Cash in the bank isn't what it used to be in any event.

Posted by: Cassandra | January 29, 2009 at 03:02 PM

"My fear is that this summer, should the cost of gas remain near 2.00, that essential symbol of the American, the SUV, will be back in vogue."

Only for the people who can get loans and still have secure jobs, who are also short-sighted schmucks.

Posted by: Jon H | January 29, 2009 at 06:18 PM

"Does this savings rate include 401Ks? It is only logical for boomers to save to a tax deferred 401k before putting money into taxed time deposits."

Lots of my friends are transferring cash from 401K to savings/checking for ready access. I wonder if this is a contributor to why the savings rate has increased suddenly.

Posted by: Mark Summers | January 29, 2009 at 06:30 PM

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