FRBSF Economic Letter
2002-09; March 29, 2002
What's Behind the Low U.S. Personal Saving Rate?
In recent years, the personal saving rate in the United States has fallen
sharply, and it is now at a very low level compared either to U.S. historical
experience or to the savings behavior of many other industrialized countries.
From 1980 through 1994, the U.S. saving rate averaged 8%; thereafter,
it fell steeply, and since mid-2000, with allowance made for the tax rebates
that boosted household saving in the months of July, August, and September
2001, it has averaged approximately 1%. By contrast, the personal saving
rates from 1980 through 2001 averaged 13% in Japan, 12% in Germany, and
15% in France, with no steep declines after 1994; in fact, in France,
the saving rate rose slightly. For the United Kingdom, the personal saving
rate was close to the U.S. rate during the 1980 to 1994 period, averaging
9%, but it has since declined only modestly to an average of 7% after
1994, while exhibiting very large swings throughout the sample period.
For Canada, the personal saving rate did decline sharply during the latter
half of the 1990s, but it is still higher than the U.S. rates, averaging
16% from 1980 through 1994 and 7% since 1994.
This Economic Letter examines the causes and the consequences
of the sharp decline in the U.S. personal saving rate, and whether there
is reason to expect that it will remain low. An understanding of these
issues requires a look at how the personal saving rate is constructed,
and how it is affected by the household's perceived need to accumulate
wealth to meet its future consumption needs.
How is the personal saving rate measured?
The most frequently cited measure of the personal saving rate is based
on the National Income and Product Accounts (NIPA). It is constructed
by forming the ratio of Personal Saving to Disposable Personal Income
(DPI), where DPI is defined as Personal Income (including wage and salary
income, net proprietors' income, transfer payments less social insurance,
income from interest and dividends, and net rental income) less tax and
nontax payments to governments. Personal Saving is found by subtracting
from DPI total Personal Outlays, 97% of which consists of Personal Consumption
Expenditures (including consumer durables), with the remainder composed
of Interest Paid by Persons (individuals, nonprofits, and trust funds)
and Net Personal Transfer Payments to the Rest of the World. Given that
personal saving is determined as a residual in the NIPA, measurement errors
that appear anywhere in the computation of DPI or Personal Outlays will
cumulate in personal saving.
In constructing the NIPA, the U.S. Commerce Department's Bureau of Economic
Analysis (BEA) treats consistently the flow data associated with current
production. As a result, the NIPA personal saving rate gives an incomplete
picture of household savings behavior. For example, the NIPA measures
of income and savings exclude the sale of or change in the market value
of existing assets. For financial assets, personal income does include
dividend and interest income to persons, but excludes capital gains and
losses. Therefore, the recent volatility in the stock market would not
show up as changes in personal income and would not be included in the
NIPA measure of personal saving. For nonfinancial assets of households,
primarily housing and consumer durables, the NIPA includes service flows
from housing as consumption, but treats expenditures and not service flows
from consumer durables as consumption. Similarly, personal expenditures
on education and training are treated as consumption. These accounting
practices overstate consumption and understate saving.
Measurement errors can have a large effect on the saving rate. For example,
in June 2001, the BEA substantially revised upward its estimate of the
U.S. personal saving rate. Under the old accounting, the average monthly
saving rate for the twelve-month period June 2000 through May 2001 was
-0.6%, including a string of eleven consecutive months of negative saving.
Under the new accounting, the saving rate averaged 1% during that period
and was positive throughout. That sizeable upward revision was largely
due to changes in the measurement of wage and salary income of employees
covered by unemployment insurance (see U.S. Department of Commerce 2001,
p. 24). Another example is the 1998 revision in the NIPA's treatment of
distributions from mutual funds, in which distributions resulting from
capital gains that were formerly treated as personal income were instead
added to corporate profits. While this had no effect on national income,
it lowered personal income, with the average saving rate for 1995-1997
falling from 4.3% to 2.8%.
Why has the NIPA personal saving rate fallen?
Many recent studies of the decline in the personal saving rate focus
on the other side of the coin, the consumption boom. That is, why has
consumption as a percentage of disposable personal income been so high?
 |
One explanation involves the "wealth effect," in which increases
in the real value of assets stimulate consumption (see, for example, Dynan
and Maki 2001 and Maki and Polumbo 2001). For example, in Figure 1, the
steep rise in the financial wealth of households beginning in the mid-1990s—which
was principally due to the soaring stock market—is almost a mirror image
of the falloff in the personal saving rate. Some argue that capital gains
should be added to personal income, thus raising household savings and
increasing the measured saving rate (see Gale and Sabelhaus 1999). Households'
wealth also includes tangible real assets, which constitute about one-third
of their total asset holdings. The principal component of tangible assets
is real estate, representing approximately 80% of the total. Like the
stock market, housing prices also have appreciated, thus adding to household
net worth and contributing to the decline in the personal saving rate.
However, unlike the stock market, housing prices have not experienced
sharp declines since the stock market peaked in April 2000, and this has
mitigated to some extent the drop in household net worth that accompanied
the subsequent stock market decline. From 2000:Q2 to 2001:Q3, total assets
held by households (financial and tangible) fell 7%, while total net worth
declined by 10%. The largest contributing factor to these declines was
a 15% fall in the market value of the financial assets of households.
During this period, the personal saving rate ceased its sharp decline
but did not reverse course. This suggests that, while all of the dynamics
of the wealth effect on consumption have yet to play out, other factors
also may have contributed to the low personal saving rate.
Another explanation for the sharp decline in the saving rate is associated
with the coincident rise in labor productivity in the latter half of the
1990s. If households perceive that the higher labor income associated
with this rise in productivity will continue into the future, then their
permanent income, or the present value of future expected income, has
increased, thus mitigating the need for additional saving out of current
income. This argument would be consistent with the continued strength
in aggregate productivity that has been in evidence in the data even during
the current economic slowdown, when productivity improvements generally
tend to fall off.
A third explanation is that financial innovation has relaxed liquidity
constraints that many households had been facing by increasing their access
to the credit markets. This argument is consistent with the observed increase
in consumer credit relative to GDP that has accompanied the consumption
boom. While this could be a significant contributing factor, the evidence
put forward does not indicate that this is the principal factor propelling
the consumption boom (see Parker 1999).
Will the low personal saving rate persist,
and is it a cause for concern?
One concern that has been expressed over a low personal saving rate is
that it may cause national savings to be insufficient to support the level
of investment necessary to sustain a high level of long-run economic growth
without excessive dependence on foreign capital. However, when savings
by businesses and government are added to personal saving, this measure
of aggregate gross saving as a percentage of GNP is estimated to have
been 17.2% in 2001:Q3, which is likely to have been the nadir of the current
recession. This figure is only moderately lower than the post-World War
II average of 19.2% and is not out of line with previous dips in the quarterly
series.
Some concern also has been expressed that an unusually low personal saving
rate may pose problems for the economy in the short run, if it were to
be quickly reversed, thus representing fundamental behavioral instabilities
in the economy. Such a view would be consistent with the notion that households
have imprudently financed the consumption boom by running up an unsustainable
level of consumer debt. Consider, for example, that the principal strength
of the U.S. economy during the current recession (apart from housing)
has been the remarkable resilience of household consumption. Had there
been a sudden unpredictable reversal of the personal saving rate, then
by definition, consumption would have fallen, which could have significantly
exacerbated both the depth and duration of the recession.
However, substantial empirical evidence to date suggests that to a large
extent the low personal saving rate in the U.S. economy is a systematic
response of households to changes in its fundamental determinants, most
notably the increase in financial wealth. Had the stock market appreciation
of the 1990s been the sole reason for the low personal saving rate, its
decline would also portend weaker consumption. However, this effect would
likely be spread out over several quarters, as some estimates of the wealth
effect on consumption suggest (see, for example, Dynan and Maki 2001).
Moreover, it may also be the case that a lower personal saving rate will
be a feature of the U.S. economy for the foreseeable future. This persistence
could be attributed to an increase in trend productivity that induces
higher permanent income for households or to a relaxation of financing
constraints due to financial innovation. To the extent that these factors
are important, the current low personal saving rate would not represent
a problem that is overhanging the U.S. economy, but is instead a manifestation
of a more efficient deployment of the economy's resources.
Milt Marquis
Senior Economist
References
|
