Wide Fluctuations in our Personal Saving Rate

In recent years, the personal saving rate in the United States has fallen significantly below earlier levels and in relation to other industrialized countries. What is behind this startling change? In his bank's Economic Letter, Milt Marquis, Senior Economist of the Federal Reserve Bank of San Francisco, provides an excellent analysis of the dramatic change. At the outset, he observes that "from 1980 through 1994, the U.S. savings rate averaged 8%; thereafter it fell steeply, and since mid-2000, with allowance made for the tax rebate that boosted household saving in the months of July, August, and September [2000], it has averaged approximately 1%." Since that time, the savings rate has increased slightly, as shown in the table below, but it was still well below the levels recorded from 1980 through 1994.

Personal savings are a major source of funds for the money and capital markets. Among other things, they help to finance consumers' purchases of homes and automobile and industry's purchase of new machinery and factories. The most frequently used definition of the savings rate, and that used here, is that used in the National Income and Product Accounts. This is the difference between after-tax personal income and personal outlays. "Outlays" are primarily composed of personal consumption expenditures and interest payments.

In sharp contrast to U.S. experience, "the personal savings rate from 1980 through 2001, averaged 13% in Japan, 12% in Germany , and 15% in France, with no steep decline after 1994." Possibly, the high savings rates in these and other countries can be attributed to an absence of the "wealth effect". When the value of your assets is rising, you have less incentive to save. This was the case in U.S. during the mid to late 1990s as both the stock market and the value of consumers' housing soared. The wealth effect dominated, and the savings rate was low.