The rate at which Americans are saving money has fallen sharply, according to the Bureau of Economic Analysis. Personal saving was 2.3% as of October, down from 7.3% a year earlier. It is the lowest since July 2005, when rates fell by 2.1%. Discussion He asked Arabinda Basistha, an economist at West Virginia University, to explain how people are saving money, what is causing it to be so low and what means a recession could happen in 2023.
What is a personal savings account?
Personal savings measures the amount of money Americans have after taxes, or thrown away, after spending on bills, food, debt and everything else. Calculated and reported by the US Bureau of Economic Analysis, it is an important part of the financial security of American families.
The latest data shows that Americans are saving just 2.3%, or US$2.30 for every $100 in after-tax income, down from 7.5% as recently as December 2021. Historically, that’s very low.
From 2015 to 2019, for example, this was about 7.6%. It rose sharply during the COVID-19 shutdown in early 2020, reaching 33.8%. With restaurants, entertainment venues and almost everything else closed, Americans had few things to spend their money on.
This has changed as the economy has opened up and people willing to travel and eat have started spending their savings.
Will the decline in savings rates continue?
American consumers generally do not change their spending and saving habits.
So to understand this decline, it is necessary to add some history.
The last time the savings rate fell this much, in 2005, it was part of a trend that lasted several years. From 1998 to 2004, prices were around 5.4%, dropping to 3.3% from 2005 to 2007. So the 2.1% figure recorded in July 2005 should be seen as part of the low income.
In recent years, Americans have been saving more of their income. Deposits reached about 9% in 2019 before the pandemic began to destroy funds. This led to a significant increase in savings.
An October 2022 study by the Federal Reserve found that US households lost $2.3 trillion during the pandemic, thanks in part to up to $1.5 trillion in direct financial aid.
Prices also rose elsewhere, as consumer spending rose and people spent more money. Based on this, I believe it is unlikely that the low prices will continue for a long time, as consumers will change their behavior before 2020.
What does the deficit mean for the US economy?
While the savings rate is important, it does not give us the full picture of America’s financial health. Also, one should not place too much importance on one type of recent data, because future revisions may be large.
A few other steps are necessary to assess your household’s financial situation.
First, current interest rates — the share of all loans that are at least 30 days past due — are at just 1.2%, the lowest since the 1980s. The rate is 1.9% for consumer loans and 2.1% for credit cards. Both prices have increased since 2021 but are still very low.
The low prices are due to pandemic relief programs and financial assistance, but they also show that Americans are financially stable.
Another metric to look at is the household debt to gross domestic product ratio. This measures the amount of debt owed by US households relative to economic growth. The most recent data from June 2022 shows a figure of 76%, which is the highest in nearly two decades. After the 2007-2009 recession, that number was even higher, almost 100%.
The third measure of America’s financial health is the share of income used to pay mortgages and other debts. US households spent an average of 9.6% of their income on mortgage payments in the second quarter of 2022, down from the 12.8% average from 2005 to 2007.
So if the recession hits in 2023, does that mean Americans will be ready?
Putting all this information together, the domestic economy appears stable and resilient to economic risks in the US.
This does not mean that lower incomes will not be a problem in the future. If savings rates remain low for another year, it will weaken household income.
Arabinda Basistha is an Assistant Professor of Economics at West Virginia University
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