An important economic statistic is the Personal Savings Rate which is defined as Savings divided by Disposable Personal Income. From the 1960’s through 1982, relatively thrifty Americans consistently saved between 10% and 15% of their incomes. Given a generally strong economy and rising net worth driven by surging home prices, individuals then shifted toward consumption of big ticket items resulting in a decline in the savings rate from the low teens in the early 1980’s to just 2.1% in 2005. From 2005 to 2019, the rate drifted irregularly upward averaging about 6%. However, a key point is that year-to-year changes in the saving rate were typically quite modest as shown below, at least until 2020. Well, what in the world happened then?
These spikes were the result of the U.S. Government stimulus programs in which 472 million payments to individuals were made totaling more than $850 billion. Given the huge level of uncertainty, many individuals saved a portion of these funds resulting in a record savings rate as well as swollen bank accounts and a reduction in consumer debt.
As we return to normal, the savings rate has fallen to 4.4% and consumer debt is once again increasing at a rapid clip. However, we are currently suffering a hangover from this unique period in history. The pandemic reduced the demand for services (restaurants, movies, fitness centers, etc.) which meant that spending was directed toward the purchase of “things.” When combined with supply chain issues, this overwhelming demand is one of the major causes of the spike in inflation that we are experiencing. With inflation exceeding wage increases, very low levels of consumer confidence, and the majority of the stimulus funds having been spent, we may well experience a slowdown in consumer spending. Given that the consumer represents about 70% of the U.S. economy, many forecasters suggest that there is something like a 50% chance of a recession, and some predict an even worse outcome, stagflation. While the Federal Reserve is raising interest rates to curb inflation, achieving a “soft landing” will be very tricky.