Personal and household savings are important, both for you and for the economy. For you, savings creates a buffer for unexpected expenses and can also be used to finance a down payment on a house or to help pay for college. You can deposit your savings in a financial institution or buy a mutual fund that invests in the stock and bond markets. In other words, your savings become an investment; that is, it is money that you put into a financial institution or instrument for which you receive a return in the form of interest or dividends.
For the economy as a whole, these savings create economic growth. Firms borrow money (your deposits) from financial institutions or sell shares to your mutual funds and then use that money to expand their businesses. Before we go further, though, we should break down some of these terms. First of all, it’s important to understand that personal savings is equal to income minus personal outlays (or consumption) and taxes:
Then, the Personal Savings Rate for any economy is defined as this ratio:
Disposable personal income(DPI), mentioned above,is your take home pay:
From another perspective, savings can be viewed as the portion of personal income that is used either to provide funds to capital markets or to invest in real assets such as residences.
What happened to the U.S. savings rate in the recent Pandemic Recession is quite unusual, to say the least. As you look at the graph below, you will see that from 2000 to 2020, the Personal Savings Rate averaged about 5% to 7% of Disposable Income. However, as the Pandemic Recession began (in February 2020) the Personal Savings Rate skyrocketed.
- In February 2020, the U.S. Personal Savings Rate was 8.3%.
- In March 2020, the U.S. Personal Savings Rate was 12.8%.
- In April 2020, the U.S. Personal Savings Rate was 33.5%.
- In May 2020, the U.S. Personal Savings Rate was 22.4%.
- In June 2020, the U.S. Personal Savings Rate was 19.0%.
Figure 6.1.U.S. Bureau of Economic Analysis, Personal Saving Rate [PSAVERT], retrieved from FRED, Federal Reserve Bank of St. Louis; September 30, 2021.
If you look at the gray bars, which indicate recessions, you can see that the Personal Savings Rate does increase somewhat. This is due to consumer sentiment or, as John Maynard Keynes called it, “animal spirits.” During a recession, the sentiment is fear. Even so, the magnitude of the Personal Savings Rate during the Pandemic Recession is unprecedented.
As stated before, the absolute amount of personal savings is the difference between income minus taxes and spending. The graph below shows this difference in absolute dollars from 2014 up to June 2020. From April to July 2020, personal income jumped dramatically from the $600 supplemental unemployment compensation and other relief payments provided by the CARES Act. However, because of fear, consumers decreased their spending. On top of this, in many states, restaurants, bars, hotels and all non-essential retail stores were shuttered in April, curtailing consumer spending and further increasing pessimistic sentiment.
Figure 6.2.U.S. Bureau of Economic Analysis, Personal Income [PI] and Personal Consumption Expenditures [PCE], retrieved from FRED, Federal Reserve Bank of St. Louis; September 30, 2021.
As this graph shows, even though personal income increased in 2020, spending still decreased, highlighting just how important consumer sentiment is to the economy. If consumers are worried about the economic future, they will put off their expenditures to whatever extent they can. During the Pandemic Recession, restaurants, bars, vacation venues and services took the biggest hit. In comparison, the 2008 Great Recession saw large durable goods expenditures (appliances, automobiles, clothing) decrease by 8%, but spending on restaurants and services stayed relatively the same. According to a recent Gallup Poll, consumer satisfaction in the U.S. has fallen, and this could curtail future spending. However, it’s worth noting that consumer satisfaction is currently not as low as it was during The Great Recession.