Personal savings rate

Personal Savings Rate

The personal savings rate represents the proportion of a household's disposable personal income that is saved, rather than spent or used to pay taxes. As a key economic indicator within the broader field of macroeconomics, it provides insight into the financial health and spending behavior of consumers. The personal savings rate reflects the percentage of income individuals have left after paying taxes and making personal consumption expenditures and other outlays. This metric is closely watched by economists and policymakers for clues about future consumer spending trends and overall economic vitality.

History and Origin

The measurement of the personal savings rate in the United States is a function of national income and product accounts (NIPA), which are compiled by the U.S. Bureau of Economic Analysis (BEA). The BEA began tracking this data from January 1959. Historically, the personal savings rate has fluctuated considerably, reflecting various economic conditions and consumer behaviors. For instance, the average personal saving rate in the 1960s and 1970s was notably higher than in more recent decades, averaging around 11.7% and peaking at 17.3% in May 1975.¹⁹

The rate experienced a significant decline from the mid-1980s through the early 2000s, even turning negative for several months in 2005.¹⁸ This decline was attributed to factors such as increasing household wealth from rising stock and housing prices—a phenomenon often referred to as the wealth effect—and increased availability of credit. Con¹⁷versely, periods of economic uncertainty, such as the COVID-19 pandemic, saw a dramatic, albeit temporary, spike in the personal savings rate as spending opportunities diminished and precautionary saving increased. The¹⁶ Federal Reserve Bank of St. Louis (FRED) provides comprehensive historical data on the personal saving rate, allowing for detailed analysis of these trends.

##¹⁵ Key Takeaways

• The personal savings rate is a crucial macroeconomic indicator showing the percentage of disposable income that individuals save.
• It is calculated by the U.S. Bureau of Economic Analysis (BEA) as personal saving divided by disposable personal income.
• ¹⁴ A higher personal savings rate can indicate greater financial health for households but may also signal slower economic growth in the short term.
• The personal savings rate can be influenced by factors like wealth accumulation, credit availability, and economic outlook.
• While useful, the personal savings rate has limitations and should be interpreted alongside other economic data.

Formula and Calculation

The personal savings rate is calculated as personal saving as a percentage of disposable personal income (DPI). The formula is:

Where:

• Personal Saving is the amount of personal income remaining after subtracting personal consumption expenditures, personal interest payments, personal current transfer payments, and personal taxes.
• Disposable Personal Income (DPI) is the income remaining to households after all personal taxes are paid.

The U.S. Bureau of Economic Analysis (BEA) officially defines and calculates this rate monthly, based on comprehensive data collected on income and outlays.

##¹³ Interpreting the Personal Savings Rate

Interpreting the personal savings rate requires understanding its context within the broader economy. A higher rate generally suggests that households are building up their balance sheet and enhancing their financial resilience. This can be beneficial for individuals planning for future events such as retirement planning or unexpected expenses. However, a rapidly rising personal savings rate can also imply reduced consumer spending, which might act as a drag on short-term economic growth, particularly in economies heavily reliant on domestic consumption.

Co¹²nversely, a consistently low or declining personal savings rate might raise concerns about households' ability to withstand economic shocks or fund future investment without incurring significant household debt. It can signal that consumers are spending a larger portion, or even more, than their after-tax income, potentially due to factors like inflation or easy access to credit. The¹¹ personal savings rate is often considered in conjunction with other metrics, such as gross domestic product (GDP) and employment figures, to gain a holistic view of economic conditions.

Hypothetical Example

Consider a household, the Millers, with the following monthly financial activity:

• Gross Income: $6,000
• Income Taxes Paid: $1,000
• Personal Consumption Expenditures (rent, food, utilities, entertainment): $4,000
• Personal Interest Payments (e.g., credit card interest): $100
• Personal Current Transfer Payments (e.g., gifts to family): $50

First, calculate their Disposable Personal Income (DPI):
DPI = Gross Income - Income Taxes
DPI = $6,000 - $1,000 = $5,000

Next, calculate their Personal Saving:
Personal Saving = DPI - (Personal Consumption Expenditures + Personal Interest Payments + Personal Current Transfer Payments)
Personal Saving = $5,000 - ($4,000 + $100 + $50)
Personal Saving = $5,000 - $4,150 = $850

Finally, calculate their Personal Savings Rate:
Personal Savings Rate = (Personal Saving / DPI) * 100%
Personal Savings Rate = ($850 / $5,000) * 100%
Personal Savings Rate = 0.17 * 100% = 17%

In this hypothetical example, the Millers have a personal savings rate of 17%, meaning they are saving 17 cents of every dollar of their disposable income.

Practical Applications

The personal savings rate is a vital metric for various stakeholders:

• Economists and Analysts: They use the personal savings rate to forecast future trends in consumer spending and economic growth. Significant changes in the rate can signal shifts in consumer confidence or economic sentiment, helping to predict potential recession or expansionary periods.
• Policymakers: Governments and central banks, like the Federal Reserve, monitor the personal savings rate when formulating monetary policy and fiscal policy. For instance, a low savings rate coupled with high household debt might prompt concerns about financial stability. Policy interventions might aim to encourage saving or manage debt levels.
• ¹⁰ Financial Planners: While the aggregate rate is macroeconomic, financial professionals often use it to understand prevailing saving behaviors and to discuss the importance of individual saving habits with clients.
• Businesses: Companies analyze the personal savings rate to anticipate consumer demand for their products and services. A declining rate might suggest a more cautious outlook for future sales.

The U.S. Bureau of Economic Analysis (BEA) regularly releases updated data on the personal saving rate, which is a key input for economic models and forecasts.

##⁹ Limitations and Criticisms

While widely used, the personal savings rate, as conventionally measured, faces several limitations and criticisms:

• Measurement Issues: The BEA's calculation of personal saving excludes capital gains from assets like stocks or real estate. The⁸refore, if individuals feel wealthier due to appreciating asset values and consequently reduce their cash saving, the personal savings rate might appear low, even if overall household wealth is increasing. This "wealth effect" can distort the true picture of financial well-being.
• ⁷ Exclusion of Durable Goods: Purchases of durable goods (e.g., cars, appliances) are considered consumption, not saving, in the NIPA accounts. However, these items provide long-term benefits and could be seen by households as a form of capital accumulation.
• ⁶ Data Revisions: The initial estimates of the personal savings rate are subject to significant revisions as more complete data becomes available. The⁵se revisions can sometimes be substantial, leading to a different interpretation of economic trends weeks or months after the initial release. Thi⁴s unreliability can pose challenges for economists and policymakers relying on real-time data.
• Behavioral Nuances: The personal savings rate is an aggregate measure and doesn't capture the heterogeneity of saving behavior across different income groups or demographics. Factors such as access to credit and shifting financial product offerings can also influence how individuals manage their money, potentially decoupling the reported rate from actual individual financial resilience. A 2011 Economic Letter from the Federal Reserve Bank of San Francisco discussed how movements in credit availability are important for explaining movements in the saving rate.

##³ Personal Savings Rate vs. Disposable Personal Income

The personal savings rate and disposable personal income (DPI) are fundamentally linked yet distinct concepts. DPI represents the total amount of money that households have available to spend or save after paying taxes. It is a measure of the total funds at a household's disposal.

In contrast, the personal savings rate is a percentage that indicates how much of that DPI is being saved. It is a ratio, not an absolute amount. Therefore, while DPI measures the pool of money available, the personal savings rate measures the propensity to save from that pool. A high DPI doesn't automatically mean a high personal savings rate if people choose to spend most of it, and conversely, a lower DPI might still result in a respectable savings rate if individuals prioritize saving. Understanding DPI is crucial to calculating and interpreting the personal savings rate, as DPI serves as the denominator in the savings rate formula.

FAQs

What is considered a good personal savings rate?

There isn't a universally "good" personal savings rate, as it depends on individual financial goals, age, and economic conditions. Historically, rates have varied widely. For many financial planners, a common guideline for individuals is to save at least 10% to 15% of their income for retirement planning and other long-term goals.

How does the personal savings rate affect the economy?

The personal savings rate can influence economic activity in both the short and long term. In the short term, a higher rate typically means less consumer spending, which can slow economic growth. In the long term, higher saving can lead to increased capital accumulation in the economy, providing funds for business investment and potentially fostering greater productivity and future growth.

Who calculates the personal savings rate in the U.S.?

The personal savings rate for the United States is calculated and released monthly by the U.S. Bureau of Economic Analysis (BEA), an agency of the Department of Commerce. This data is part of the broader National Income and Product Accounts (NIPA).

##²# Is the personal savings rate affected by inflation?
Yes, inflation can impact the personal savings rate. When inflation is high, the purchasing power of money erodes, and people may find that their income doesn't stretch as far. This can lead to less discretionary income available for saving, potentially driving down the real personal savings rate. Conversely, if wages keep pace with or exceed inflation, households might maintain or increase their saving capacity.

Does the personal savings rate include investments like stocks?

The personal savings rate, as measured by the BEA, primarily focuses on the portion of disposable personal income that is not consumed. It does not directly include changes in the value of existing assets like stocks or real estate (capital gains). However, if individuals choose to save by investing in these assets from their current income, that action would contribute to personal saving.¹