Americans’ personal savings rate nears all-time low: Economist explains what it means as a potential recession looms

The rate at which Americans are saving money has fallen near a record low, according to the Bureau of Economic Analysis. The personal savings rate was 2.3% as of October, below the 7.3% of the previous year. It is the lowest since July 2005, when the rate hit a record low of 2.1%. The conversation order arabinda basistaWest Virginia University economist, to explain the personal savings rate, what makes it so low, and what it means as a potential recession looms in 2023.

What is the personal savings rate?

The personal savings rate measures how much of Americans’ after-tax or disposable income is left over after spending on bills, food, debt, and everything else. Calculated and reported by the US Bureau of Economic Analysisit is an important component of the financial security of American families.

The latest data shows that Americans are saving just 2.3%, or $2.30 of every $100 they earn after taxes, up from 7.5% in December 2021. Historically, that’s very low.

From 2015 to 2019, for example, this rate averaged around 7.6%. It increased dramatically during the COVID-19 lockdown in early 2020, to a record 33.8%. With restaurants, entertainment venues and almost everything else closedAmericans had fewer things to spend money on.

That has changed as economies have opened up and people eager to travel and dine out have started spending money they had saved.

Will the fall in the savings rate continue?

American consumers generally do not change dramatically their consumption and saving behavior.

So to understand this decline, it’s important to add some historical context.

The last time the savings rate fell this low, in 2005, it was part of a trend that lasted several years. From 1998 to 2004, rates averaged around 5.4%, falling to 3.3% from 2005 to 2007. Therefore, the 2.1% rate recorded in July 2005 must be seen as part of a phase of low savings rate.

In recent years, Americans have been saving more of their disposable income. The savings rate averaged nearly 9% in 2019 just before the pandemic choked off spending. This led to the massive increase in savings.

A October 2022 study by the Federal Reserve found that US households accumulated $2.3 trillion during the pandemic, thanks in part to roughly $1.5 trillion in direct fiscal support.

Rates swung back in the other direction as consumer spending rose and people used up their excess savings. Against this backdrop, I think the current low rates are highly unlikely to continue for long as consumers adjust to pre-2020 patterns.

What does falling savings indicate about the state of Americans’ finances?

While the savings rate is important, it doesn’t give us a complete picture of the financial health of Americans. Also, too much weight should not be attached to a single recent data set, as future revisions can be big.

Some other measurements are necessary to assess the state of the household’s finances.

First, the current delinquency rates: the proportion of all loans that are past due for at least 30 days. they are at only 1.2%the lowest since at least the 1980s. He rate is 1.9% for consumer loans and 2.1% for credit cards. Both rates have increased since 2021, but remain historically low.

low rates are due in part to the pandemic tolerance programs and fiscal support, but still show that Americans are in very good financial shape.

Another metric worth considering is the ratio of household debt to gross domestic product. This measures the debt burden of US households relative to the size of the economy. The The latest data for June 2022 show the proportion at 76%, which is close to the lowest in about two decades. Before the 2007-2009 recession, the ratio was significantly higher, around 100%.

A third measure of Americans’ financial health is the share of disposable income that is spent on mortgage payments and other debts. American homes they spent around 9.6% of their income debt service in the second quarter of 2022, well below the average of 12.8% from 2005 to 2007.

So if there is a recession in 2023, does this mean that Americans will be prepared for it?

Adding all this information together, household finances appear fairly stable and capable of withstanding moderate economic risks to the US economy.

This is not to say that a persistently low savings rate will not be a problem in the future. If the savings rate remains low for another year, the financial position of households will be weakened.

arabinda basista He is an associate professor of economics at West Virginia University

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