The Personal Saving Rate: What It Doesn’t Mean to You

A few years ago, when the economy was humming along at a brisk pace, the nation’s personal saving rate hovered around the 0% mark, even falling below zero briefly in 2005.¹ The headlines noted the decline as a dramatic departure from historical norms. Some observers framed it as bad news for the U.S. economy — evidence that American consumers had gone wild, spending their tomorrows on trips to the mall.

Fast forward to today: The saving rate has recovered to more normal levels (about 4% to 6% of disposable income) — yet now it is tisk-tisked as too high for an ailing economy, one that needs Americans to return to their profligate ways in order to boost the recovery.²

Why the focus on the nation’s personal saving rate? Should a high rate — or a low one — concern you? Is there some useful comparison with your own saving habits?

Stalked by Bean Counters

The nation’s personal saving rate is the sum of some simple math involving huge sums of money (and it has nothing to do with tallying up everyone’s bank accounts). It is the nation’s personal disposable income minus its personal outlays. In other words, it’s what is left of the nation’s after-tax income after consumers spend it on bills, fees, interest payments, living expenses, and whatever else they spend money on.

The federal government tracks personal income and outlays as part of its ongoing measurement of gross domestic product, the sum of all U.S. economic activity. Government economists gather data about what people earn from all sources, including work, investments, and government benefits, and what they spend it on, everything from food and clothing to cars and houses.

The term personal saving rate can be misleading. It’s not really “personal” because it reflects the collective activities of all U.S. households in a given period. Nor does it define “saving” in the same way that most people do. The money that you put in an IRA or a 401(k) plan is not counted as personal saving, but, in theory, the loose change that falls between the couch cushions is. Although some of the money captured in the personal saving rate undoubtedly ends up in bank savings accounts, it would be a mistake to look at the rate as representative of what the typical American saves every month.

Who Cares?

Complaints about a high saving rate have to do with economic recovery. A dollar saved isn’t spent in the marketplace, creating jobs and boosting incomes. And recent data suggests this is happening across the U.S. economy. Retail sales are down.³ Sixty percent of economists polled by The Wall Street Journal agreed that consumers would need to substantially increase spending before the economy would return to sustained growth.⁴

Consumer spending accounts for about 70% of all demand in the U.S. economy (spending by businesses and government accounts for most of the rest).⁵ But consumers appear to be hanging on to disposable income rather than spending it. Economists see this as the beginning of a long-term trend, one of consumers rebuilding their balance sheets, saving for retirement, and paying down debts.

A high saving rate by itself is not really problematic. It’s the adjustment to lower spending that causes big problems for businesses. When times are good and people have money to spend, businesses ramp up production capacity to meet growing demand. But when consumers tighten their spending, businesses must cut back on costs to remain profitable. This means cutting back on employees, spending less on raw materials, postponing purchases of new equipment, and other measures that have ripple effects across the economy.

And what benefits does a high saving rate offer? A healthier economy, for one. Consumers who spend less than they make are generally in a stronger position financially. Spending all or more than one earns can lead to high debt levels and interest expenses, and the need to restrain spending. Consumers who have money tucked away may be more confident in their futures, more willing to take on risk, more likely to earn money on their savings, better able to purchase big-ticket items, and generally in a better position to spend.

The personal saving rate is likely to remain in the news until it falls significantly. If that happens, expect some experts to say that it indicates anemic conditions are behind us and the economy is growing again.

You can pick up some clues about the health of the consumer and the U.S. economy by keeping an eye on the saving rate. But don’t let it influence your own behavior significantly. The amounts that you choose to save, spend, and invest should be based on your own personal circumstances and goals.

1–2) Bureau of Economic Analysis, 2008–2009
3–5) The Wall Street Journal, August 19, 2009

The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by StoneRiver–Emerald. © 2009 StoneRiver, Inc.