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Authors for macroblog are Dave Altig, John Robertson, and other Atlanta Fed economists and researchers.

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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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I agree with Cassandra, and others.

The baby boom often started their careers late (or switched careers) and put heavy demand into home ownership, plus had to fund their own pensions (a mixed blend, starting out with defined benefit, that went away, and transitioning into defined contribution). These are responsibilities that previous generations did not have as explicitly.

This has been a generation transitioning through all kinds of structural changes in an economy with declining marginal rates of growth. Plus during boomer lifetimes (OK, I am one), we have monetized a lot of labor (parenting, caregiving, meal preparation, etc.).

Ergo, we really do need to think carefully about how we are measuring 'savings,' and what it means since the structures and personal responsibilities of people's lives have changed dramatically.

Posted by: Laocoon | January 30, 2009 at 10:57 AM

Countries differ in the way household disposable income is reported (in particular whether private pension benefits less pension contributions are included in disposable income or not), therefore the comparison between savings rates in the United States and other countries could be difficult to make. However, the OECD adjusts for this difference when reporting savings rates in the member countries. In 2007, the savings rate in the OECD countries ranged from 13.1% in France to a negative 3.6% in Finland. Australia’s savings rate was reported at 0.3%, and the United States had the third lowest at 0.7%. Savings rates in Austria, Germany, Sweden, Switzerland, Belgium, and Spain were around 10%. Japan’s savings rate was reported at 3.2% and Korea’s at 3.9%.

Employee contributions to 401(k)-type plans are part of wages and salaries (a gross concept before deductions) in the period of the contribution. They are not part of outlays, and therefore are included in personal saving in the period of the contribution. Employer contributions to 401(k)-type plans are part of employer contributions for employee pension and insurance funds in the period of the contribution. Therefore, these contributions are included in personal income, they are not part of outlays, and are therefore included in personal saving in the period of the contribution.

Posted by: Sandra and Galina | February 05, 2009 at 10:58 AM

Common sense would indicate that a diversion from consumption to savings would represent a drag on economic growth. Indeed, the UST estimate that a move to 5% personal savings would sap $500bn from global demand (including multiplier effects). So, in the short-term, higher personal savings = bad for growth. The degree to which this personal saving is off-set by govt dis-saving will, I suppose, depend on the degree to which Ricardian equivalence holds, and the different multipliers that might attach themselves to household vs govt spending.

However, both neoclassical and endogenous growth theory appear to indicate that a shift to a higher savings rate leads to an increase in the level of GDP (in the case of neoclassical gt), or indeed the pace (for endogenous gt). So higher saving = good for growth (at the very least by moving steady state to a higher level assuming no technology).

Keynesian national accounting identities equate saving with investment. So doesn't have much to say about the impact on growth I guess.

And at a global level NET debt must always be zero, so there can be neither leveraging or deleveraging at the system level (although there could be among different sectors).

Please disentangle my confusion.

Posted by: Confused about saving | February 05, 2009 at 11:49 AM

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