2010-03-01 22:10:00 - By Dave Manuel
Savings Rates In The United States Have Collapsed Since Mid '80s
The US Department of Commerce: Bureau of Economic Analysis has data on the personal savings rate of the average American from January 1st, 1959 until present day.
Before we get into this article, let's define a few terms:
Disposable Income = Personal Income less Personal Current Taxes
Personal Saving = Disposable Personal Income - Personal Outlays
Personal Saving Rate = (Personal Saving / Disposable Personal Income) * 100
Note: Personal outlays will include such things as food, housing, transportation, in addition to interest payments on non-mortgage debt and transfer payments to government or social services
Now that we have gotten the definitions out of the way, let's look at the historical trend of personal savings rates in the United States.
In the first month that the BEA (Bureau of Economic Analysis) provided us with data (January 1959), the personal savings rate in the United States was 8.3%. So, this means that, on average, Americans were able to save 8.3% of their disposable incomes.
For the next decade or so, the personal savings rate remained more or less the same, in the 7.5% - 8.5% range.
In the early 70s, the average savings rate started to spike, hitting a peak of 14.6% in May of 1975. The spike in personal savings rates from 1973 to 1975 coincided with the deep recession that was ravaging the country over the same period of time. As you will see, recessions (usually) result in increased personal savings rates as people tend to dramatically scale back on their purchases in times of economic distress.
After spiking in the mid '70's, the savings rate started to fall once the country pushed through the recession. By the late '70s, the rate had fallen to 7.9% before starting to trend higher once again. Why? You guessed it - another recession.
The recession of the early '80s was a particularly nasty mix of high inflation and weak economic activity, otherwise known as "stagflation". The average savings rate spiked to 12.2% in November of 1981, which was right when the national unemployment rate in the country really started to trend higher. The average savings rate pulled back when the economy started to recover, spiked over 10% once again in 1984, and then really started to noticeably pull back in the mid '80s. Consumer confidence was rapidly improving in the country, Ronald Reagan swept to victory on the back of a strengthening economy, and people were starting to spend their money once again. It was "morning in America".
There was another recession in the early '90s, but no noticeable increase in the average savings rate. As a matter of fact, the savings rate of the average American held steady during the recession of the early '90s, and then proceeded to fall like a stone throughout the rest of the decade.
By January 2000, the average savings rate was 3.5% - it would end up falling below 1.0% multiple times between 2000 and 2010.
When the economy nearly collapsed in 2008, the savings rate started to trend higher, moving from 1.3% in January of 2008 to 4.2% in December of 2009.
Why the dramatic drop in the average rate of savings between 1990 and 2008?
The mindset of the average US consumer changed. There was greater access to credit and increasingly sophisticated marketing campaigns that had people cracking open their wallets or purses in droves.
Due to the surge of available credit, many people actually maintained negative savings rates. I'm sure that we all have known somebody who has spent more than what they made - this was all made possible through the explosion of available credit.
This access to credit made people want to spend, and marketers exploited this to the nth degree. People were flush with cash (and credit) in the post 9-11 economy. Interest rates were low, the real estate market was strong and many people were in a mood to spend. And spend they did.
TV shows and commercials and Internet advertising campaigns were bombarding us 24/7 with images that appealed to our materialism. We took the bait and spent money like we had never spent it before, completely abandoning the thrifty mindset of the prior generation.
People ended up overextended due to way too much easy credit being dished out, and the economy fell flat on its face in 2008.
The average savings rate, which had plummeted to basically zero, now started to rebound as people stressed about their financial futures.
It's pretty simple - when people are feeling good about their circumstances, they spend more. When people are worried about their futures, they save more.
Access to credit has been significantly pared back in the United States since the beginning of the recession in December of 2007. If the national unemployment numbers continue to stay high over the next year or two (and there is no reason to think that they won't), then it will be interesting to see how the average personal savings rate will respond.
Source: St Louis Fed - Personal Saving Rate
Filed under: The Economic Meltdown
6 COMMENTS - What Say You?
Comment by Johnathan F. W. on February 13, 2011 @ 9:11 pm
We may still be home of the brave, but we are no longer land of the free. We have become slaves to our spending ways. We now march to beat of the marketeer in an induced or slumbering state. Even with the worse recession in more than fifty years, I'm not sure enough of us are awakened to save ourselves.
Comment by mark on February 26, 2011 @ 5:08 pm
Keep in mind, or should i say, from my perspective, the savings rate can be applied to people in a position to save. There are many work-a-day-to-day-to-day-hand-to-mouth folks who cannot save. They simply do not make enough to save if they tried. This excludes those who complain about this payment and that payment but no matter how bad things get they will pay for that big satellite dish in the front yard.
What about the folks who take on enormous responsibility (and expensive)? Folks who literally make less that what their promises call for? You know what i'm talking about? Extra nieces and nephews and children and grand-children and great-grand-children. Some of these folks, try as they may ...can not save. Most of their thoughts are how are we going to get the money for the next big thing they see coming.
These folks rely on the folks who are able to save. It is in that crowd that i am sure you focus. I am thinking it is the folks who had figured they had 'arrived' and therefore could spend more (much much more). These folks, i suspect, are bringing the savings rate down.
But wait. There's more. We have 'brainy' people in government stealing your money. That's right i say stealing folks money. These 'brainy' people are paid to monkey with the economy. HEY. GO GET A REAL JOB. When these folks 'decide' the economy is moving too slow they say, "Let's heat things up." But then when the economy, in their opinion is heating up or in other words growing faster than 'they' think necessary, they throw cold water on everybody. Of course, it would be a whole lot better if market forces determined speed ups and slow downs.
So in waltzes inflation. OH NO! This effects them rich folks too. They may think they are cutting 'back' to so-and-so levels, but are they really. If someone, though having more dough in both pockets BUT that dough is worth less than it was at the so-and-so level, then they are actually spending more (in terms of actual dollar bills).
Just to be clear. The savings rate is partly the fault of the civilian. That is something the individual (some; keep in mind the folks who live hand to mouth rely on well off folks for income) can control.
Big bad GUMmet also, and unfortunately so, is also to blame for the low savings rate.
Thank you for you time. You are now returned to your low/no saving selves.
Comment by Greg on August 20, 2012 @ 5:00 pm
It's interesting that total Federal Debt and total Personal Debt are almost exactly the same. For every $1,000 you go out and borrow, the Feds do likewise on your behalf. How thoughtful of them.
Buy while you can is my theory. Your dollar will buy much more today than it will in 5 years when we start to inflate our way out of this mess. Go buy quality things that will last you a long time (if such things still exist) because that dollar in the bank earning .01% won't be worth squat soon.
Comment by Richard Schneeberger on October 23, 2012 @ 9:17 am
With practically zero return on my saxings, I may be embarraseg at times, but my Bernanke pants,they have fringe on the bottoms, will last a while longer. When I was Younger, raising my family, we needed a house, the interest rate was hardlu a consideration. Why not return more to the savers?
Comment by Doug Heiwig on December 11, 2012 @ 1:10 pm
Mark, Sorry I didn't read this much earlier. Very good points and something that many people should be aware of. I think a historical perspective of savings and GPD would be interesting for comparison sake.
I can not imagine how Investment will grow our current Economy. Oh, I forgot, Quantitative Easing, the Bernanke plan to "Repaper America".
Without Investment, there can be no Growth in the Economy, specifically no long term growth.
Again, sorry I am late, but good thoughts.
Comment by Ulysses on December 13, 2012 @ 2:42 am
Back in 1970 before Nixon trashed Bretton Woods and took the dollar off the gold standard and turned it into a fiat currency, a gallon of gas cost around 25c. Today it costs around $3.50 or about 14 times more in nominal dollars. The story is more or less the same with other necessities of life as well.
In other words, during the last four decades the fiat dollar has lost over 90% of its purchasing power making saving fiat dollars not only meaningless but outright dangerous.
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