Conclusion: The decline in national savings is a structural impediment that will cause an increased reliance on foreigners to fund U.S. deficits.
The long decline of the savings rate in the United States has been a widely discussed topic. In fact, we highlighted this in the Early Look yesterday morning with a chart showing savings as a percentage of GDP, which in the 1970s and 1980s was in the 5 – 7% range and has since declined to the 1 – 3% range.
Many pundits suggest the decline in savings is a non-issue, while others, more on the extreme, believe that it one of the primary economic issues currently facing the United States. While the implications can be debated, the fact remains that the savings rate has declined dramatically over the past few decades and is among the lowest of any modern nation state.
As a refresher, the basic formula used to calculate savings rate is as follows:
- (Income – Federal Taxes – Expenditures = Savings) / Disposable Personal Income
The Bureau of Economic Analysis keeps this statistic via its NIPA (National Income and Product Accounts) savings rate, which is computed by that savings output as outlined above divided by disposable personal income. The expenditures include interest payments, but exclude mortgage payments.
Critics of this calculation suggest there are a couple of major factors that are excluded from the above calculation that should, arguably, be included, which are: homes and capital gains on stock sales. That is, as we purchase a home and pay down our mortgage, and the home appreciates in value, it is a form of savings. As it relates to stock sales, when we realize capital gains this inherently increases our net worth and, ostensibly, our savings; although arguably this is just a return on prior savings.
The reality, though, is that savings rate is still a decent proxy for the American consumer’s savings rate and, more importantly, the direction of those savings, especially as it has been calculated with some consistency by the Department of Commerce over time.
In the first chart below we show the savings rate versus the Fed Funds Rate – which we use as a proxy for the interest earned in savings accounts. Long term, and not surprisingly, as the interest rate has decreased, so, too, has the rate that American consumers have saved at as they have attempted to find higher returns for their hard earned capital. In the short term, the savings rate has increased slightly, but based on the long term trend of interest rates down and savings rate down, it seems that a more sustained increase in savings is unlikely until consumers are incentivized to save via higher interest rates.
In the second and quite honestly more alarming chart, we’ve outlined the broad savings rates within the U.S. economy. This is a combination of consumer based savings, government savings via surpluses (or lack thereof), and corporate savings. In early 2009, savings in aggregate as a percentage of GDP went negative for the first time since 1952, and has continued its downward trend.
One potential economic risk to the low savings rate is that U.S. consumers retrench and opt to change their consumption patterns and instead of spending, they aggressively begin to save. This would be the reversion to the mean theory of savings and is somewhat fanciful absent an increase in interest rates.
There are also some serious headwinds facing the United States in increasing its savings rates related to demographics. Specifically, old people save less than young people. Therefore as a population ages the savings rates will naturally decline, and create a headwind to increasing that rate. In the United States, this is the trend. According to a 2006 report on demographics from Congress, by 2025 18% of the population will be over 65 years old, versus 12% in 2000.
More broadly, the primary risk of a lack of savings in the United States, be it personal, corporate, or governmental, is an inability to fund, via domestic means, the large deficits being run by the federal government – currently at north of 10% of GDP.
While the issue of dependence on foreign oil is accurately raised as a real economic and strategic risk to the United States, what about the risk related to a dependence on foreign debt financing? The combination of a low domestic savings rates and lack of government savings (i.e. a massive deficit) means that the United States will continue to rely on foreign financing to bridge deficits well into the future. Considering, any external shift on the margin in perception of the U.S.’s credit quality is likely to have a substantial impact on Treasury yields.
Daryl G. Jones