The fall and rise of personal savings

Americans are beginning to save again, or so the media is reporting. The personal saving rate has jumped from 0.4% in 2007 to a whopping 6.9% in May. But what does that mean? Is it a good thing? And how long will it last?

The Personal Saving Rate

Personal saving rate” is an economic term for income that is not used immediately to buy goods and services. It’s money that consumers save for the future. (According to Wikipedia, it’s “personal disposable income minus personal consumption expenditure”.)

For decades, the personal saving rate hovered at about seven or eight percent. It would spike into the teens during times of economic turmoil, but then settle at seven or eight percent when things returned to normal. During the early 1990s, the personal saving rate began to drop. For the past ten years, it’s mostly been two percent. Or one percent. Or close to zero.

But, as resident GRS economist JerichoHill has noted in the past:

The personal saving rate is a very poor metric. Most folks save via IRA and 401K. So we should look at that savings rate, which is the national saving rate. The NSR shows the same disturbing downward trend, but is the more proper metric to use, in my opinion.

In other words, the personal saving rate doesn’t tell the whole story. One reason for the drop is the increase in retirement savings via other methods.

Still, the personal saving rate can be a useful barometer. It may not account for retirement savings, but it does account for things like emergency funds, etc. Plus, it’s the number that the mainstream media reports. For these reasons, it makes sense to use the personal saving rate as a gauge.

The U.S. Bureau of Economic Analysis provides historical data about the personal saving rate, as well as charts that graph the data:


The Bureau of Economic Analysis also provides a monthly press release summarizing the current state of income and saving in the United States.

The Stimulus Effect

As you can see from the BEA graph, the current recession has had a huge impact on the personal saving rate. We were saving at close to zero percent throughout 2007 and into 2008, but when the economy began to teeter, people started to save. Here’s the personal saving rate for the past twelve months:


When things went to hell in October, Americans boosted their savings. But look at that spike in May. 6.9%?!? Can that be right? It turns out the data is misleading. Reporting for the L.A. Times, Tom Petruno explains:

…[A] single month’s data can be skewed by unusual items.

That’s what happened in May: One-time federal stimulus payments of $250 each to retirees and others receiving government aid — so-called transfer income — drove total personal income up 1.4% from April, while spending rose a modest 0.3%.

That boosted what the government calculates was left in people’s pockets. Savings as a percentage of total disposable income jumped to 6.9% from 5.6% in April.

This same effect can be seen each time the government has issued stimulus checks in the past decade. (You can actually see the tail-end of the effect in the year of data I posted above. The personal saving rate for May 2008 was 4.8%, then 2.5% in June, and 1.7% in July. This is a result of last year’s stimulus checks.)

So it seems that many people really do save their stimulus checks when they receive them. I think that’s a Good Thing. And it also looks like the personal saving rate in the U.S. has increased to levels last seen during the mid-1990s. But will this change last? Or is saving just a passing fancy?

Saving For the Future?

When people ask me about the state of the economy and its effect on consumer habits, I’m cautiously optimistic. I’m pleased that the average person has begun to consider saving a priority. But I’m also skeptical that any real change has taken place. I think people are scared and so they’re saving, but I’m worried that as soon as things settle, they’ll resume their old habits. I’m not the only one who believes this.

Suzanne S. recently sent me a Mediaweek article featuring comments from Google CEO Eric Schmidt. Schmidt — who obviously is not a financial expert — believes the economy will begin growing again later this year. And when it does, he expects consumers to resume spending.

“It’s shocked me that Americans started to save,” Mediaweek quotes Schmidt as saying. “My guess is that’s a temporary phenomenon.” More from the article:

But Schmidt does not believe the economic crisis has shaken U.S. consumers’ proclivity to spend money by going into debt. “Americans love their credit cards,” he said. “If people are concerned Americans will stop spending, you do not understand the American psyche.”

I worry that Schmidt is correct. I worry that this recession will not be a generation-defining event, as some have predicted. I want for this crisis to have changed things, but I’m not sure it has.

But maybe some Americans have learned something from all of this. And maybe my own efforts have been enough to make a difference in a few lives. I want people to understand that nobody cares more about their money than they do. The best defense against an unknown future is to take action now, to build a buffer of personal savings, to reduce the burden of debt, and to develop skills that will make you valuable to yourself and others.

Just because the average personal saving rate across the nation is low, there’s no reason that your own personal saving rate can’t be 10%. Or 12%. Or 15%. Or more.

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