The U.S. personal savings rate fell to its lowest level in more than a decade, setting off a firestorm of speculation about the implications. For 2017, the annual savings rate was 3.4 percent, down from 4.9 percent in 2016 and worse than it’s been since 2007. Late last year, savings dipped to 2.4 percent, the lowest monthly level since fall 2005.
The Bureau of Economic Analysis tracks the widely watched personal savings rate. It looks at personal income, less personal spending and taxes, to get a measure of savings. Personal savings are then expressed as a percentage of disposable personal income. It’s often seen as the portion of personal income invested in capital markets or real assets such as residences.
High savings rates are not necessarily a positive economic signal, because they typically reflect fear and retrenching by consumers. With the economy at essentially full employment and continuing to grow, individuals feel less fearful about the future and, thus, less pressure to build up savings. During and after the Great Recession, savings rates rose significantly for a few years before beginning to fall. It’s a pattern observed after other past recessions as well.
Another reason savings may be dropping is increasing wealth. With the stock market setting records, household wealth has risen substantially. People viewing growing balances in investment and retirement accounts feel more freedom to spend, which would drive down savings. This wealth effect is neither surprising nor a signal of bad things to come — unless, of course, a major market correction leads to financial stress.
Other contributing factors range from tax-law changes to low interest rates (and the resultant small incentives to save in certain accounts). Such conditions also affect individual decisions. We may well see the savings rate pop back up over the next few months. And the recent very low monthly reading could be a slight overstatement of the real situation.
Intervening factors at work could also be part of the explanation and an indication that the situation isn’t as dramatic as it looks. However, the fact remains that we’re back where we were a decade ago and consumers may well be overextending. It’s not a sustainable pattern because more reasonable savings will be needed to meet future needs.
At an individual or family level, a lack of savings can lead to financial distress if income is interrupted. Without a cushion, a missed paycheck can lead to borrowing at high rates or other actions with long-term negative effects. For the economy, if people aren’t saving, there is less available to loan out without borrowing from external sources.
Bottom line: We don’t want savings too high, as it implies retrenching and fear and spells bad things for the consumer-driven U.S. economy. On the other hand, savings that are too paltry bring negative implications for the future if low rates persist. Spending now means less available for long-term needs such as a home or retirement. The risks of financial duress are also higher as some consumers overextend themselves.
Some degree of overspending right now is neither unexpected nor a source of major concern. Many families feel wealthier and more confident about the future than in a while. Long-term continuation of these low savings levels, however, could have adverse consequences.