U.S. savings habits

Pandemic-era savings are less consequential today in sustaining consumer spending than they were a few years ago. That is not to say that all the sand has entirely spilled through the hourglass; households still have more cash on hand today than a linear trend extension from the prior cycle might suggest. A more interesting concept is whether the experience of the past few years has re-shaped consumer behavior.

One perhaps unexpected legacy from the pandemic era of swollen savings accounts has been a shift to a structurally lower saving rate in this cycle. Even as excess cash remains more evenly distributed across the wealth-spectrum than previously thought, lower-income consumers are growing more financially strained.

Even as excess liquidity has faded in importance, the saving rate is still a key metric for tracking consumer health. Spending outpaced income growth in the beginning of 2024 as the personal saving rate slid to 3.6%, marking the lowest rate at which households saved in 14 months. The saving rate is off its post-pandemic low, which broke below 3%, but remains well-below the average rate at which households were saving in the pre-pandemic era, which was 6.1%. This can be compared to a famously savings-oriented country, Germany, at 11.4%.

To some extent, this is just the continuation of a long-term trend lower in the saving rate. From the mid-1970s to the 2008 recession, households have consistently saved less in the aftermath of each recession than they did in the prior cycle. On that basis, a structurally lower saving rate is not surprising and is consistent with typical behavioral shifts in the wake of a recession. In fact, if there is a cycle that breaks the mold, it is the 2009-2020 expansion. That was the first and only cycle in which households saved at an average rate above the prior cycle average in nearly 50 years. This points to the financial strain caused by the 2008 downturn and resulting shift in consumer behavior.

A number of factors play a role in the trend decline in the saving rate over the past half century including: an accompanying trend lower in interest rates, the value of non-cash financial assets and home values, as well as the rise of defined contribution retirement plans. Our sense is that past behavioral patterns hold true today, particularly since households did not experience a balance sheet recession in 2020 and rather saw somewhat of a balance sheet expansion. We anticipate the saving rate will likely remain lower until something sparks a change in household habits.

A lower saving rate isn’t necessarily a large problem for near-term spending, which is still expected to be increasingly dependent on income, but it does pose a challenge for the sustainability of consumption further out. Households have proved time-and-time again that they are willing to pull out all the stops to keep spending; simply saving less on a monthly basis being one of them. But when we think of the medium-to-longer term trajectory of spending, saving becomes more important. Just as a well-stocked pantry can get a household through between trips to the market, a sufficient balance in the savings account helps support larger outlays, whether on purchases of consumer durables or property, and it helps shore up the financial health of households generally. In other words, households are more susceptible to economic shocks when in a more vulnerable financial position and having less in the ‘rainy-day’ fund contributes to that vulnerability.

At a broad macro level, households retain some “excess” liquidity even if it is no longer sloshing around and contributing to supply shortages and longer delivery times as it was a few years ago. In other words, the “over saving” during the pandemic, which corresponds to the surge in the saving rate, still outweighs the “under saving” done since the economy reopened and the saving rate dropped. Pinpointing precise estimates of remaining liquidity is challenging as the savings data are subject to wide revisions and don’t simply reflect outstanding cash balances.

Data show that remaining excess liquidity is more evenly distributed across the wealth spectrum in the U.S. than previously thought. Compared to where cash balances would be based on pre-pandemic trends, balances are actually the most elevated for those below the top 10%. Less-wealthy consumers thus may have a bit more near-term spending power, which can help stave off a more pronounced slowdown in total spending.

But middle-to-lower income households still look to be struggling more than the macro data would suggest. The Federal Reserve Bank of New York, for example, found that delinquency rates are rising fastest among younger and lower-income borrowers. Robust data breaking out household saving rates and other variables by income or wealth are not widely available, but Moody’s Analytics calculates estimates of saving rates by income. The Moody’s estimates reveal that households in income cohorts below 80% have been saving at negative rates for close to two years, which implies they are spending more than they are bringing in each month in the form of income.

A lower saving rate is problematic in that it suggests households may be spending today at the expense of tomorrow. This seems to be the American way of living. Both for people and for the government there seems to be a credit card mentality. Extra liquidity was a key factor in helping the economy stave off economic contraction in recent years, even though it created high inflation, and revised data suggest excess cash may still be a factor in why households keep spending.

Saving less on a monthly basis in order to sustain spending can continue to add to an already robust spending trajectory this year, but it raises the vulnerability of the household sector generally in that ‘rainy day’ funds may be depleted. The Moody’s estimates on saving rates by income highlight the risk that lower income households have been drawing down savings for the better part of the past two years. Wealthy households may be able to sustain aggregate spending, but the drawdown in savings by other income groups suggests wobbly fundamentals and may explain why broad measures of consumer sentiment remain mediocre even as spending soars.

The best way for a better economy and more savings is clearly to spend less. The American society and economy are consumption focused and is built on a notion of continued consumption growth. The system is constructed around the need for a credit score, and using credit cards, getting loans, spending with money you don’t have. Stop spending money you don’t have and don’t buy into the American spending dream, it is all made up by companies, corporations, politicians, but it us just a massive scam and manipulation. Spending is not good, spending is bad…Stop buying things you don’t need. It is time to break the vicious cycle and stop spending money recklessly. Just Say No!

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