Personal saving rate

What Is Personal saving rate?

The personal saving rate is an economic indicator that represents the percentage of disposable personal income that individuals save rather than spend on consumption. This rate offers insights into the financial health of households and can influence broader economic trends. It is a key component within economic indicators, reflecting the overall behavior of consumers. The U.S. Bureau of Economic Analysis (BEA) defines personal saving as the income left over after people pay taxes and spend money²². The personal saving rate helps economists and policymakers understand consumer behavior and predict future economic growth²¹.

History and Origin

The concept of tracking personal saving rates has been integral to understanding national economic activity since the mid-20th century. The U.S. Bureau of Economic Analysis (BEA) has been tracking the personal saving rate since at least 1959, providing a long-term historical perspective on how Americans save²⁰. The calculation of the personal saving rate is part of the broader National Income and Product Accounts (NIPA), which were developed to measure the current productive activity of the economy¹⁹. Over time, the methodology for calculating the personal saving rate has been updated to incorporate new and revised source data, improved estimation methods, and changes in definitions and concepts, all aimed at enhancing its accuracy and relevance¹⁸. For instance, a notable change in August 1998 by the BEA removed certain forms of capital gains from income, which affected the reported figures for personal income and, consequently, the personal saving rate¹⁷.

Key Takeaways

• The personal saving rate measures the proportion of disposable personal income that households set aside as savings.
• It is calculated by dividing personal saving by disposable personal income.
• The rate is a vital economic indicator, providing insights into consumer behavior and household financial health.
• Changes in the personal saving rate can have short-term and long-term implications for consumer spending and overall economic activity.
• Data for the personal saving rate is regularly published by the U.S. Bureau of Economic Analysis (BEA) and tracked by institutions like the Federal Reserve.

Formula and Calculation

The personal saving rate is calculated as the ratio of personal saving to disposable personal income, expressed as a percentage. Personal saving is derived by subtracting personal outlays (which include personal consumption expenditures, personal interest payments, and personal current transfer payments) from disposable personal income. Disposable personal income, in turn, is calculated by taking personal income and subtracting personal taxes¹⁶.

The formula is:

Where:

• (\text{Personal Saving} = \text{Disposable Personal Income} - \text{Personal Outlays})
• (\text{Disposable Personal Income} = \text{Personal Income} - \text{Personal Taxes})

Interpreting the Personal saving rate

Interpreting the personal saving rate involves understanding its implications for both individual households and the broader economy. A higher personal saving rate generally suggests that households are setting aside a larger portion of their after-tax income, potentially indicating a greater sense of financial security or a cautious outlook on future economic conditions. This can mean more funds are available for investment in capital markets or real assets¹⁵. Conversely, a low personal saving rate might suggest that households are spending a larger share of their income, perhaps indicating strong consumer confidence or an inability to save due to high living costs¹⁴.

Economically, a rising personal saving rate can temporarily slow economic growth as less money is spent on goods and services, which comprise a significant portion of economic activity¹³. Conversely, a falling rate may temporarily boost economic activity due to increased consumer spending¹². However, the ideal rate depends on various factors, including the stage of the business cycle and long-term investment needs.

Hypothetical Example

Consider a hypothetical household, the Millers, to illustrate the personal saving rate.

1. Calculate Personal Income: In a given month, Mr. and Mrs. Miller earn a combined gross salary of $8,000. They also receive $200 from a side gig and $100 in interest from a savings account.

   • Total Personal income = $8,000 + $200 + $100 = $8,300

2. Calculate Personal Taxes: Their total personal taxes (federal, state, and local) for the month amount to $1,500.

3. Calculate Disposable Personal Income (DPI):

   • DPI = Personal Income - Personal Taxes
   • DPI = $8,300 - $1,500 = $6,800

4. Calculate Personal Outlays: The Millers' personal outlays (rent, groceries, utilities, transportation, entertainment, etc.) for the month total $6,000.

5. Calculate Personal Saving:

   • Personal Saving = Disposable Personal Income - Personal Outlays
   • Personal Saving = $6,800 - $6,000 = $800

6. Calculate Personal Saving Rate:

   • Personal Saving Rate = (Personal Saving / Disposable Personal Income) × 100%
   • Personal Saving Rate = ($800 / $6,800) × 100% ≈ 11.76%

In this example, the Millers' personal saving rate for the month is approximately 11.76%. This means they saved nearly 12% of their after-tax income.

Practical Applications

The personal saving rate is widely used by various entities to understand and project economic trends. Government agencies, such as the Bureau of Economic Analysis (BEA) and the Federal Reserve, track this rate closely to gauge the overall financial health of the U.S. population and inform monetary policy decisions. For instance, the Federal Reserve Bank of St. Louis provides extensive historical data on the Personal Saving Rate. Bu¹¹sinesses and analysts also monitor the personal saving rate to anticipate shifts in consumer spending and adjust their strategies accordingly. A higher personal saving rate might signal future increases in consumer demand, while a sustained low rate could indicate a reliance on debt or a struggle to accumulate wealth.

During economic downturns, a rising personal saving rate can sometimes exacerbate the slowdown, as individuals increase saving in response to uncertainty, leading to further reductions in consumer spending. Co¹⁰nversely, during periods of economic recovery, a declining personal saving rate often accompanies a surge in consumption as consumer confidence returns and spending opportunities expand. For example, during the COVID-19 pandemic, a combination of government stimulus and restrictions on activities led to a surge in the personal saving rate, which then deteriorated sharply as the economy reopened and inflation increased the cost of living.

#⁹# Limitations and Criticisms

While the personal saving rate is a crucial economic indicator, it is not without limitations and criticisms. One significant critique is that the official measure by the Bureau of Economic Analysis (BEA) may not fully capture all forms of household saving. For instance, it typically excludes capital gains and losses from personal income, even though taxes paid on realized capital gains are subtracted from income. Th⁸is means that appreciation in the value of assets like stocks or real estate, which contributes to household wealth, is not reflected in the personal saving rate calculation.

A⁷nother criticism revolves around the treatment of certain expenditures. For example, spending on durable goods, such as automobiles or appliances, is considered consumption, even though these items can be viewed as investments that provide benefits over many years. Th⁶is accounting method can potentially understate the true level of household saving. Furthermore, the personal saving rate is subject to significant revisions over time, which can create challenges for economists and policymakers relying on initial estimates for real-time analysis. Th⁵ese revisions can be substantial, sometimes even larger than the initial reported rate. Re⁴searchers have noted that data on the personal saving rate, disposable personal income, and personal outlays all tend to be revised upward.

#³# Personal saving rate vs. Disposable Personal Income

The personal saving rate and disposable personal income are closely related but distinct concepts. Disposable personal income (DPI) refers to the amount of money individuals have left after paying personal taxes. It represents the total funds available to households for either spending or saving. In essence, DPI is the "pool" from which both consumption and saving occur.

The personal saving rate, on the other hand, is a percentage that expresses how much of that disposable personal income is actually saved rather than spent. While DPI is an absolute dollar amount, the personal saving rate is a ratio that indicates the propensity to save. A high DPI does not automatically mean a high personal saving rate; individuals with high DPI might still have a low saving rate if their consumer spending is also very high. Conversely, someone with a lower DPI might exhibit a higher personal saving rate if they are disciplined about setting aside a significant portion of their available funds. The personal saving rate thus provides a behavioral insight into how households allocate their disposable funds.

FAQs

What is considered a good personal saving rate?

There isn't a universally "good" personal saving rate, as it can depend on individual circumstances, financial goals, and stages of life. However, financial advisors often suggest aiming to save at least 10% to 15% of your disposable personal income for long-term goals like retirement. Economically, what constitutes a "good" national personal saving rate can be debated, as it impacts both current consumer spending and future investment.

How does the personal saving rate affect the economy?

A rising personal saving rate generally means less current consumer spending, which can slow economic growth in the short term, especially if the economy is already weak. However, higher saving provides more capital for investment, which can boost long-term productivity and economic potential. Conversely, a falling rate supports current consumption but may reduce funds available for future investment.

Who calculates the personal saving rate?

In the United States, the personal saving rate is primarily calculated and released by the U.S. Bureau of Economic Analysis (BEA), an agency of the U.S. Department of Commerce. This data is part of the broader National Income and Product Accounts (NIPA) and is frequently cited by the Federal Reserve and other economic institutions.

#²## Why did the personal saving rate spike during the pandemic?

The personal saving rate saw an unprecedented spike during the COVID-19 pandemic, particularly in 2020 and 2021. This was largely due to a combination of factors, including government stimulus payments which boosted personal income, and restrictions on in-person activities and services which limited opportunities for consumer spending. Many households found themselves with more disposable personal income and fewer ways to spend it, leading to a temporary surge in savings.¹