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According to the Bureau of Economic Analysis, the rate at which Americans are saving money has fallen to an all-time low. The personal savings rate as of October was 2.3% against 7.3% last year. That’s the lowest since July 2005, when the rate hit a record low of 2.1%. The conversation West Virginia University economist Arabinda Basista was asked to explain the personal savings rate, what’s pushing it so low, and what it means as a potential decline looms in 2023.

What is the personal savings rate?

The personal savings rate measures how much of Americans’ after-tax or disposable income is left over after spending on bills, food, debt and everything else. Calculated and reported by the US Bureau of Economic Analysis, it is an important component of the financial security of American families.

The latest data shows that Americans save just 2.3%, or $2.30, of every $100 they earn after taxes, down from 7.5% in December 2021. Historically, that’s very low.

From 2015 to 2019, for example, this indicator averaged around 7.6%. It spiked in early 2020 during the COVID-19 shutdown to a record high of 33.8%. With restaurants, entertainment venues and just about everything else closed, Americans had less to spend money on.

That has changed as economies have opened up and people who want to travel and dine out have started spending their savings.

Will the savings rate continue to decline?

American consumers typically do not dramatically change their consumption and saving behavior.

So to understand this decline, it’s important to add some historical context.

The last time the savings rate fell this low, in 2005, it was part of a multi-year trend. Between 1998 and 2004, rates averaged about 5.4%, falling to 3.3% from 2005 to 2007. Thus, the 2.1% interest rate recorded in July 2005 should be seen as part of the low interest rate phase of savings.

Americans have been saving more of their disposable income in recent years. In 2019, the savings rate averaged about 9%, just before the pandemic choked spending. This led to a massive increase in savings.

An October 2022 study by the Federal Reserve found that US households hoarded $2.3 trillion during the pandemic, thanks in part to about $1.5 trillion in direct fiscal support.

Rates swung back in the other direction again as consumer spending rose and people tapped into that excess savings. Against this background, I think it is unlikely that the current low rates will last long as consumers return to 2020.

What does the decline in savings signal about the financial health of Americans?

While the savings rate is important, it doesn’t give us the full picture of Americans’ financial health. Furthermore, one should not place too much importance on a recent set of data, as future revisions may be large.

Several other measures are needed to assess the state of household finances.

First, current delinquency rates — the share of all loans that are at least 30 days past due — are just 1.2%, the lowest since at least the 1980s. The rate for consumer loans is 1.9%, for credit cards – 2.1%. Both rates have increased since 2021, but are still historically low.

The low interest rates are due in part to pandemic relief programs and fiscal support, but still show that Americans are doing pretty well financially.

Another indicator worth looking at is the household debt to gross domestic product ratio. This measures the debt burden of US households relative to the size of the economy. As of late June 2022, the ratio stands at 76%, the lowest in nearly two decades. Before the 2007-2009 recession, that ratio was significantly higher, at nearly 100%.

A third measure of Americans’ financial health is the share of disposable income spent on mortgage and other debt payments. US households spent about 9.6% of their income on debt service in the second quarter of 2022, down significantly from an average of 12.8% between 2005 and 2007.

So if there is a recession in 2023, that means Americans will be ready for it.

Putting all this information together, household finances look fairly stable and can withstand moderate economic risks to the US economy.

This is not to say that persistently low savings rates will not be a problem in the future. If the level of savings remains low for another year, it will weaken the financial positions of households.The conversation

Arabinda Basita is an Associate Professor of Economics West Virginia University

This article is reprinted from The Conversation under a Creative Commons license. Read the original article.


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