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Why is U.S. personal savings rate declining while interest rates are still elevated?

When interest rates are high, the logical consequence is that consumers spend less and save more because the cost of borrowing is high and the credit market is tighter. However, this is not what we are assessing when observing U.S. personal saving rates. Americans are saving less despite high-interest rates. Indeed, the U.S. personal savings rate remains below its historical average, according to the U.S. Bureau of Economic Analysis.

How could personal savings rate be defined? According to the U.S. Bureau of Economic Analysis, personal savings rate is the income left over after people spend money and pay taxes. It represents the percentage of their disposable income that people save. The data show that in January 2023, personal savings rate was at 4%. It grew to 4.3% in February, then 4.5% in March, before declining to 4.1% in April.

Personal savings as a percentage of disposable income in the United States from December 2015 to April 2023

Source: Statista & U.S. Bureau of Economic Analysis

Between June 2015 and March 2020, personal savings rate was 7%. This number, however, dramatically surged in April 2020 to 33.9% after the coronavirus kicked in. The stimulus checks issued by the Federal Reserve contributed to a significant decline in personal savings rate throughout 2021, from 26% in March 2021 to 7.5% in December 2021. And this declining trend continued throughout 2022, although the Fed started hiking interest rates following rampant inflation. Collectively, Americans have trillions in excess savings compared with expectations leading up to the pandemic, according to the Federal Reserve economists.

Personal savings rate declined between March and April 2023 because American consumers believe that the forthcoming recession that everyone has been waiting for the last two or three years is no longer imminent as it once was. Most American consumers believe that in the worst-case scenario, the economy will experience a soft landing rather than an actual recession.

Furthermore, the stock market, which remains one of the foremost indicators to assess the health of the U.S. economy, shows that the U.S. economy remains resilient despite having high-interest rates. Corporate earnings were positive for many companies, and the S&P 500 entered bull-market territories, which is the ultimate reflection of high performance and positive outcomes in financial markets. Bull markets encourage investors to increase their holdings in financial markets.

The persistence of consumer spending is why Jerome Powell and his troops refuse to cut interest rates. They believe it is too risky to cut interest rates since inflation remains somewhat elevated. But the fact that some economic indicators have been slowing down showed to Powell that consumer demand is gradually declining.

The central bank’s boss affirmed in his last testimony before Congress that the Federal Reserve Board of Governors planned on hiking interest rates twice more before the end of the year. It is expected that rates will be hiked to nearly 6% by December 2023. This means that the central bank will continue to squeeze the credit market, which, in turn, will lead to an increase in personal savings rate.


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