Saving Grace

Are lower saving rates a sign of trouble ahead?

When I started earning money as a paper boy, my parents made me open a savings account at the local bank. Every week, I would take my pay (eight dollars!) and my passbook to a teller, who would update my principal and interest using a huge accounting machine. On rare occasions, I was allowed to withdraw fifty cents to purchase a milkshake at the local Woolworth’s.

By my count, there are at least five anachronisms in that story. But the focus on savings remains as relevant today as it was back then. Putting money aside is important for individuals, and the aggregate amount of savings is important for an economy. Recent discussions of saving rates and their relationship to spending illustrate how much has changed over the decades, and how much remains the same.

Saving rates rose immensely across economies during the pandemic period. Government support programs, many designed to stimulate demand, elevated household incomes. A considerable portion of the transfer payments were set aside for later use, given the uncertain outlook and restricted access to services like leisure and hospitality.

Advanced Economies Excess Savings

As economies reopened, households began to dip into their reserves. Saving rates are down significantly over the past three years; in the United States, they stand at about half of their pre-pandemic level. A high level of saving can provide fuel for future spending; low levels of saving might lead to belt tightening. This is one of the reasons forecasters have been expecting much more modest growth in consumption.