Academic journal article Review - Federal Reserve Bank of St. Louis

The Decline in the U.S. Personal Saving Rate: Is It Real and Is It a Puzzle?

Academic journal article Review - Federal Reserve Bank of St. Louis

The Decline in the U.S. Personal Saving Rate: Is It Real and Is It a Puzzle?

Article excerpt

Since the mid-1990s, the national income and product accounts personal saving rate for the United States has been trending down, dropping into negative territory for three months during the past two years. This paper examines measurement problems surrounding two of the standard definitions of the personal saving rate. The authors conclude that, despite these measurement problems, the recent decline of the U.S. personal saving rate to low levels seems to be a real economic phenomenon and may be a cause for concern for several reasons. After examining several possible explanations for the trend advanced in the recent literature, the authors conclude that none of them provides a compelling explanation for the steep decline and negative levels of the U.S. personal saving rate. (JEL D10, E21)

Federal Reserve Bank of St. Louis Review, November/December 2007, 89(6), pp. 491-514.

The national income and product accounts (NIPA) personal saving rate computed by the Bureau of Economic Analysis (BEA) includes households and other nonprofit institutions and entities (such as charities and churches), and it is calculated simply by taking the difference between disposable personal income (essentially, incomes of all kinds minus taxes) and personal consumption expenditures (outlays including non-mortgage interest payments), then dividing this quantity (i.e., personal saving) by disposable personal income (see Figure 1).1

In the past two decades, the widely reported NIPA personal saving rate for the United States has been trending down, dropping from averages of around 9 percent in the 1980s, to approximately 5 percent in the 1990s, to almost zero in the first years of the new century. Recent reports in the media have alerted the public that the U.S. saving rate, as currently measured, is at its lowest level since 1933, the bleakest year of the Great Depression. Of course, this historical comparison is disturbing at a minimum. Moreover, monthly data on household debt service payments as a percent of personal income have reached all time highs (see Poole, 2007).

The strongly declining trend in Figure 1 poses a number of problems. Taken at face value, a negative personal saving rate simply means that U.S. households are consuming more than their after-tax income allows them to. This tendency seems to be structural: For instance, the U.S. personal saving rate has remained persistently non-positive since April 2005. One naturally wonders whether it really can be true that the United States has become a spendthrift nation.

On a deeper level, many researchers and commentators have expressed a concern that the recent down-trending behavior of the U.S. personal saving rate may pave the way to a structural and persistent dependence of the U.S. economy on savings coming from foreign individuals and firms, in the form of structural current account deficits.2 As argued by a number of authors (see Poole, 2005, for a review of the basic arguments), a situation in which the U.S. net international investment position keeps growing more negative as a percentage of gross domestic product (GDP) is inconsistent with long-run equilibrium: In such a situation, no debtor in the international financial market would be allowed to expand his position (as a percentage of output) without bounds. Because an adjustment is eventually inevitable, running a large current account deficit then becomes a risky strategy; hard landings-reductions of the international net debt position based on painful and disruptive adjustments in the domestic economy-may not be ruled out ex ante.

From simple macro economic principles, it is well known that the following accounting identity must hold at all times:

private gross investment = personal saving + business saving + net saving of the public sector + borrowing from foreigners (current account deficit)

In other words, a given level of investments (mostly by firms) may be financed by household savings, by public sector surpluses (when it collects more taxes than current expenditures and transfers), and by foreign investment. …

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