Savings Rate - Where is it going?

March 29, 2010

There seems to be a general belief that in the US, there has been a reset of consumer behavior after the "great recession." I saw a recent Bain consulting study that claims that the new normal is that "consumers transition to a moderately higher savings rate of 7-9%." If the personal savings rate goes up, then the belief is that more of the money will find its way to the banks and the banks will be able to make more money using those cheap funds from deposit accounts.

I quite don't see it that way. I think that the consumer is going to go back to the old ways in the next 18 months as the economy stabilizes, as the US economy stops shedding jobs in aggregate even if it is not adding net new jobs.

The savings rate has been in a steady downward trend for a long time driven by the availability of easy consumer credit, confidence in the long term prosperity, and increase in wealth in the home and stock equity.  Some argue that the home equity has decreased significantly in this housing correction and hence people will save more to off-set that decrease in wealth. In reality, studies by the federal reserve show that "over five-year periods, the effect of capital gains in corporate equities on saving is substantially larger than the effect of capital gains in housing or other assets."

I contend that the great recession is a temporary interruption in that trend rather than an instigator of the "new normal." Bureau of Economic analysis report on March 29th on PERSONAL INCOME AND OUTLAYS is a good exhibit. "Personal saving as a percentage of disposable personal income was 3.1 percent in February, compared with 3.4 percent in January." I have calculated the 4 month moving average based on the latest data from St. Louis Fed. The trend in the last 5 months is down.

What do you think the savings rate will do in the US? Will go back to the pre-"great recession" trend or will stabilize at a higher rate?

Karthik