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Tuesday, April 02, 2013

Are Americans "Saving Too Little"? Or Has Income Growth Tanked?

Tyler Cowan links to a piece inThe Economist website discussing the decline in the personal saving rate (personal saving as a percent of disposable personal income) in the U.S., which begins: “Americans probably aren’t saving enough.”  Leaving aside the discussion of the split between retirement and non-retirement savings, and whether some policy options should be adopted to increase saving generally, the piece is thin on explanations for the decline in the personal saving rate.  Oddly, one explanation sort of leaps out and is not that hard to find.

But first, the decline in the personal saving rate is real:
(Click to enlarge.)

The personal saving rate rose through the 1950s and 1960s, and peaked at slightly over 12% in 1975.  It has declined more-or-less steadily since the early 1980s.  What’s interesting is that the Private savings rate (gross private saving divided by gross domestic income) has not declined in the same way, or nearly as much.  Gross private saving includes business saving as well as personal saving, and will therefore be a larger fraction of national income.  Both the increase in the gross private saving rate and its decline (which also begins in the early 1980s) are smaller, and the gross private saving rate has returned to its 1986 level (about 20%).  The personal saving rate, even after recovering from its 2005 low point, is still well below its historical average.
(Click to enlarge.)
What could be driving the behavior of the personal saving rate?  My first thought was that it could changes in disposable personal income.  So I looked.  The following chart shows the five-year (cumulative) growth in real personal disposable income.  This is calculated from quarterly data, so, for each quarter, the growth is calculated from the date 20 quarters earlier.
(Click to enlarge.)
I’m tempted to say, “Well, what a surprise!”  The 5-year percentage growth in real disposable personal income rose in the 1960s and then began to decline.  It tended to recover in business cycle recoveries, but has never even begun to approach the peak growth rates in the 1960s.  More to the point. Virtually all of the 20-quarter periods (all but one of them) in which the growth in disposable personal income has been less than 10% have been…the 16 most recent such periods—beginning in 2009.  The highest 5-year rate of growth in real personal disposable income in the past four years came at the end of 2008.  There has been no recovery in the rate of growth of real personal disposable income growth similar to that in past recoveries, and the growth since 2009 is at, and remains at, a post-World-War II low.

This seems to make the decline in the personal saving rate quite explicable, as the following chart suggests.  Low rates of growth in real disposable personal income are associated with (I would suggest that they cause) low rates of personal saving out of disposable income.  The correlation between the two is 0.71, so it’s not just a relationship, it’s quite strong.  So if we are concerned about low rates of saving, we should be concerned to do more to generate higher rates of growth in real personal disposable income. 
(Click to enlarge.)
(All data used in this post can be found at the St. Louis Federal Reserve Bank’s on-line macroeconomic database, FRED.)


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