Uh-oh: Americans have slashed their savings to a 12-year low, leaving them with smaller rainy-day funds to weather another economic tempest.
Or have they?
By at least one government measure, savings do appear to have plummeted. The monthly report on personal spending, produced by the Bureau of Economic Analysis, shows the U.S. savings rate fell to 2.4% in December. That’s the lowest level since 2005.
Just two years ago, the savings rate was more than twice as high.
A falling savings rate is potentially a load of trouble for the economy. It could be that Americans are spending beyond their means, for one thing. And low savings means there’s less money available for loans without borrowing from foreigners.
Another measure of savings tracked by the Federal Reserve, however, shows Americans are in better shape. The Fed’s flow of funds report suggests the savings rate was closer to 6% at the end of the third quarter.
What’s the difference? The BEA treats the full purchase price of big-ticket items such as autos as a onetime expense, basically ignoring that most people pay via monthly installment plans. The Fed’s tool only takes into account monthly payments when determining the savings rate.
“Part of the reason behind the recent drop in the saving rate is the fact that big ticket purchases like automobiles are treated as a cash outlay by the consumer even if financed, so when auto sales surge, the saving rate plunges,” noted Joshua Shapiro, chief U.S. economist at MFR Inc.
Yet even though the BEA and Fed don’t add up, the both tell the same story: savings have fallen.
The decline is not entirely a surprise. Nor it is evidence that a nearly nine-year-old U.S. expansion is on its last legs. The economy is growing steadily, unemployment is at a 18-year low, stocks keep setting fresh record highs, consumer confidence has soared and businesses are investing at the strongest pace in years.
Good times, in other words, tend to result in Americans spending more and saving less.
Some temporary factors are also probably at work. Wealthy people, for example, likely shifted some income they normally would have earned last year to 2018 to take advantage of the recently passed tax cuts. Companies may have also delayed year-end bonus payments for the same reason.
If that’s the case, expect savings to bounce back in the next few months. Savings could get another boost if Americans sock away a good portion of the extra money they take home because of the tax cuts. That will give them more financial cushion.
“I would be shocked if we do not see a substantial rebound in the savings rate in early 2018,” said Stephen Stanley, chief economist at Amherst Pierpont Securities. “If the savings rate is still down in the 2%’s by mid-2018, then you can begin to worry, but the anxiety over this now will almost certainly prove to be misplaced.”