Is the Saving Rate Too High?

Last Friday in the Wall Street Journal, it was announced that consumer spending slowed to a crawl in August. Consumer spending rose by only 0.1% in August after a 0.5% increase in July. The worry expressed in the article is that this portends a poor third quarter 2019 for the broader measure of US economic health -- real Gross Domestic Product. Maybe it means a national recession is coming?

As usual, the folks at such publications have nothing to do but try to write exciting stories when very boring economic information trickles out. Imagine the top execs at the WSJ sitting in their expensive chairs drinking lattes in the afternoon after the government announced the data. Nolan, the head guy, says, "Hey dudes, nothing happened to consumer spending last month."

Charlie nearly spills his extra hot mocha and agrees and says,"Noley, we all know that monthly data jump around more than a tuna in a shark tank. In fact, the increase of 0.5% in July when annualized was more than 6%. That's hot stuff for consumer spending in real terms."

Peter wakes from his nap and congratulates both his colleagues on their drink choices and adds that "if you average the increases in July and August, you get a very reasonable number of about 0.3% which when annualized would be around 4% per year. Real growth of consumer spending of 4% for two months ain't bad."

Much ado over nothing. I thought I would dig deeper to see if there might be something going on and I decided to follow up on some words in the article about saving. There is a national statistic known as the personal saving rate. Let's call it the PSR. The PSR tells us what percent of a household after-tax personal income is not spent -- that is, it tells you the percent of income that is saved. I asked my buddy FRED at the Saint Louis Fed to graph the PSR for the US from 1959 to the present. See the table below.

Many things will influence the PSR, and you can see from the below graph that it has had some interesting cycles. During those times when the PSR was generally rising, it meant that consumer spending was probably weak; when the PSR was falling consumers were having a little more fun on Amazon.com.

We are told we should save. Saving is good! Why? Because it helps you prepare for spending in the future. It also supports economic growth by allowing more spending on capital projects. Capital projects and various innovations often need funding. If banks are full of saving funds, then it facilitates the flow of funds from those who don't need the money right now to those who do. So you might say that ample savings is good for the future growth and expansion of business and the economy.

But the other side of the coin (must there always be the other side of the coin?!) is that spending today gets pinched the more we save today. Interesting that a rise in saving is a signal of less spending today and more spending tomorrow. Retirees and future retirees know that very well.

Thus we see why some analysts might wring their hands over the recent rise of the PSR. In the table, you can see that the recent rise is part of a longer term trend that started back in 2005. That rising trend, however, appears to be more a return to long-term normalcy than a record-breaking threat to consumer spending. The most recent rates were in the neighborhood of about 7%. But the average rate over the entire period was closer to 9%. A closer look at the chart shows many quarterly PSRs of well above 10% (in 1973 the peak rate was 14.5%).

As usual, the real story is a lot more complicated than the daily press has time or interest to tell you about. Woowee -- the PSR went up in August. Sort of like you getting on the scale and your weight went up two pounds after a Grand Slam breakfast a Denny's. A return to normalcy in the saving rate might pinch spending now but it clearly is an important thing for the country's long-term gains in productivity and output.