Americans’ personal savings rate is near an all-time low – an economist explains what it means as a potential recession looms

The rate at which Americans are saving money has dipped close to an all-time low^[1], according to the Bureau of Economic Analysis. The personal savings rate was 2.3% as of October, down from 7.3% a year earlier. It’s the lowest since July 2005, when the rate hit a record low of 2.1%.

We asked Arabinda Basistha^[2], an economist at West Virginia University, to explain the personal savings rate, what’s driving it so low and what it means as a potential recession 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 U.S. Bureau of Economic Analysis^[3], it is an important component of the financial security of American families.

The latest data shows Americans are saving just 2.3%, or US$2.30 of every $100 they earn after paying taxes, down from 7.5% as recently as December 2021. Historically, that’s very low.

From 2015 to 2019, for example, this rate averaged around 7.6%^[4]. It rose dramatically during the COVID-19 shutdown in early 2020, to a record high of 33.8%. With restaurants, entertainment venues and almost everything else closed^[5], Americans had fewer things to spend money on.

That’s changed as economies have opened up and people eager to travel and dine out have begun to spend the money they had saved.

Will the savings rate decline continue?

American consumers usually do not change^[6] their consumption and saving behavior dramatically.

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 trend that lasted several years. From 1998 to 2004, rates averaged about 5.4%, slipping to 3.3% from 2005 to 2007. Thus the 2.1% rate recorded in July 2005 should be seen as part of a low-savings rate phase.

In recent years, Americans have been saving more of their disposable income. The savings rate averaged nearly 9% in 2019 just before the pandemic stifled spending. This led to the massive swing upward in savings.

An October 2022 study^[7] by the Federal Reserve found that U.S. households accumulated $2.3 trillion during the pandemic, thanks in part to about $1.5 trillion in direct fiscal support^[8].

Rates swung again in the other direction, as consumer spending has surged and people use up those excess savings. Against this backdrop, I believe it is quite unlikely that the current low rates will continue for long, as consumers adjust back to pre-2020 patterns.

What does the drop in savings signal about the state of Americans’ finances?

While the savings rate is important, it doesn’t give us the full picture of Americans’ financial health. Moreover, one should not put too much importance on a single set of recent data, as future revisions can be large^[9].

A few other measures are necessary to assess the state of household finances.

First, current delinquency rates – the share of all loans that are past due for at least 30 days – are at just 1.2%^[10], the lowest since at least the 1980s. The rate is 1.9%^[11] for consumer loans and 2.1% for credit cards^[12]. Both rates have increased since 2021 but are still historically low.

The low rates are partly due^[13] to the pandemic forbearance programs^[14] and fiscal support, but still show Americans are in pretty good shape financially.

Another metric worth looking at is the household debt to gross domestic product ratio. This measures the debt burden of U.S. households relative to the size of the economy. The latest data from June 2022 shows^[15] the ratio at 76%, which is near the lowest in about two decades^[16]. Ahead of the 2007-2009 recession, the ratio was significantly higher, at about 100%.

A third measure of Americans’ financial health is the share of disposable income spent on payments for mortgages and other debts. U.S. households spent about 9.6% of their incomes^[17] servicing debts in the second quarter of 2022, well below the 12.8% average from 2005 to 2007.

So if there’s a recession in 2023, does this mean Americans will be ready for it?

Adding all this information together, household finances look quite stable and able to withstand moderate economic risks to the U.S. economy.

This is not to argue that a persistently low savings rate will not be an issue in the future. If the savings rate remains low for another year, it will weaken household financial positions.

References

1. ^{^} has dipped close to an all-time low (fred.stlouisfed.org)
2. ^{^} Arabinda Basistha (scholar.google.com)
3. ^{^} the U.S. Bureau of Economic Analysis (www.bea.gov)
4. ^{^} this rate averaged around 7.6% (fred.stlouisfed.org)
5. ^{^} everything else closed (www.ajmc.com)
6. ^{^} do not change (research.stlouisfed.org)
7. ^{^} October 2022 study (www.federalreserve.gov)
8. ^{^} $1.5 trillion in direct fiscal support (www.bloomberg.com)
9. ^{^} can be large (fredblog.stlouisfed.org)
10. ^{^} are at just 1.2% (fred.stlouisfed.org)
11. ^{^} rate is 1.9% (fred.stlouisfed.org)
12. ^{^} 2.1% for credit cards (fred.stlouisfed.org)
13. ^{^} are partly due (www.federalreserve.gov)
14. ^{^} pandemic forbearance programs (libertystreeteconomics.newyorkfed.org)
15. ^{^} latest data from June 2022 shows (fred.stlouisfed.org)
16. ^{^} lowest in about two decades (tradingeconomics.com)
17. ^{^} spent about 9.6% of their incomes (fred.stlouisfed.org)