With markets focussed on rate cuts from the Federal Reserve and what sorts of policy levers might be used in a downturn, we got good news this week in learning that Americans’ personal saving rate is higher than previously thought. Should we enter an economic downturn in the near future, households will have room to spend more and save less, potentially meaning we wouldn’t need
as aggressive a response from the Fed or Congress.
Now that we know the saving rate is at 8.1 percent, rather than 6.1 percent as believed a month ago, we can see how different this environment is for households versus the past two cycles. In December 2000, on the brink of the 2001 recession, the saving rate was 4.2 percent. In December 2007, as the great recession was beginning, the saving rate was 3.7 percent. The saving rate would have to fall by around 4 percent— equivalent to around $750 billion in annual consumption — before households would find themselves as tapped out as they were then.
Consider how differently households and policymakers might be able to act if there were a downturn in near term. Because saving rate was low heading into prior two downturns, households had to sp-end less and save more as economy was turning down.
This meant that some other actor had to pick up the slack — in both 2001 and 2008 this meant aggressive interest rate cuts and a wider budget deficit through a combination of automatic stabilisers and fiscal stimulus. If households are going to save more, some other large entity — the government, corporations or the foreign trade channel — has to spend more.
With the saving rate high relative to the last 25 years, households aren’t in the position where they need to save more. So if an economic shock originated elsewhere — if corporations or
the government found themselves needing to save more — households could spend more.
With consumption accounting for around 70 percent of gross domestic product, a downturn where households act as the steady hand would probably mean less need for stimulus overall, particularly important if the government had to save more — perhaps if trillion-dollar budget deficits ever lead to higher inflation.
Households remain generally cautious towards their finances, with the scars of the great recession still fresh.
The relatively muted pace of the expansion this decade is itself related to households not being willing to borrow and spend like they did. That level of caution may have meant a disappointing pace of economic growth, but it also serves as protection against a nasty recession.
—Bloomberg