The voices of Urban Institute's researchers and staff
March 16, 2012

To save or spend: Meeting the short-term and long-term consumption needs of US households

March 16, 2012

Two just-published reports provide useful insights on patterns of household saving in the United States. The analyses highlight the policy dilemma that comes during and after recessions. As American consumers, we tend to save more than we should during recessionary periods, when more spending would stimulate economic expansion. We then tend to fall back into myopic spending habits, when more saving would promote the economy’s long-run growth potential and help provide for our own long-term needs.

Amidst the statistical avalanche of the 2012 Economic Report of the President are the most recent numbers on personal saving (as a percent of disposable personal income) before, during, and after the Great Recession. From a pre-recession level of 2.4 percent in 2007, the saving rate more than doubled to above 5 percent in 2008–2010, exceeding 6 percent in some quarters during the recession. This reflects the collective reaction to the enormous drop in household wealth that was a result of plunging stock market values and housing prices. The total wealth decline was the equivalent of 1.8 years of income for the average household, the steepest drop since such data were first collected in the early 1950s.

During 2011 the saving rate then fell to below 4 percent as pent-up demand for consumer durables (especially cars) buoyed consumption. This has been welcome news for the economic recovery, but it suggests a return to a historical path of not saving, a matter of concern for our long-term economic health.

Barry Bosworth of the Brookings Institution focuses on this long-run horizon in his book The Decline in Saving. As Bosworth points out, our personal saving rate has declined over the past three decades. From an average of 7.7 percent in the 1970s, it dropped to 7.2 percent in the 1980s, 4.7 percent in the 1990s, and then 2.4 percent during 2000–2007. As explanations for this decline, Bosworth points to easier credit availability and financial innovations that enabled households to extract equity from homes and other assets, fueling a more consumption-oriented economy. He notes that Canada is an instructive comparison, observing that “the mortgage market innovations that led to the growth of the subprime mortgage market in the United States were largely absent from Canada.”

Whether American households under-save or over-save is a complex question from a macroeconomic perspective; it hinges importantly on the level of saving or dis-saving in the corporate and public sectors.  The evidence suggesting a return to long-term trends of under-saving in the household sector is discomforting, with discernible risks apparent as one moves down the income distribution. Do households have sufficient assets to weather financial emergencies, to withstand national economic downturns, and to meet their retirement needs? If upcoming data show continued low rates of personal saving, in a world where low interest rates do little to encourage thrift, we should heighten our focus on savings initiatives, especially targeted to low- and middle-income consumers, to break the pattern of saving too little.


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