Background
This blog has tracked the huge jump and dramatic drop in the personal savings rate as the pandemic unfolded. The most recent government data shows that the savings rate continues to drop, to its lowest in over 10 years. Why? What does this portend for households’ financial health?
Findings
- The personal savings rate is at its lowest since the Great Recession: The quarterly personal savings rate, what people make minus what they spend, was 5.2%. The last time it was this low was in 2009 on the heels of our last recession.
- The long-term savings trend continues to be downward. Previous analyses showed that since Boomers reached the workforce, savings has been on a downward slide.
- The last big stimulus was in 2021 Q1. For a year the government pumped money into the economy via households’ pocketbooks. That’s now a distant memory.
- Inflation caught up with consumers: In the 12 months ending in June 2022, the inflation rate of 9.1% exceeded the growth of household income of 3.5%. Buying the same amount of “stuff” costs more today than a year ago.
Implications
During the pandemic, households took their cue from the government and spent – a lot! But as income stops growing inflation erodes purchasing power, our spending splurge can’t continue. Americans have shown little ability to save money and it looks like we’ll get caught out again. While this may be short-term good news for politicians who want to keep the economy out of recession, it’s bad news for households who seem unable to build a nest egg. This sets us up for a bad ending. Now is the time to get clients to practice better long-term savings hygiene.
Following posts will examine how spending has changed over the past two years.
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The small print
The savings data is from the Bureau of Economic Analysis. The inflation data is the Consumer Price Index from the Bureau of Labor Statistics. And it’s only fair to point out that by the traditional measure of recession, two quarters of declining Gross Domestic Product, that we’re already in a recession.