Personal Savings Rate: What's Going On? Can Spending Drive the Economy

The personal savings rate fell to 2.6% in the 4th quarter. The all-time low rate 2.2% in 2005. What's going on?

The Wall Street Journal says Consumers Can’t Keep Driving the Economy.

Gross domestic product grew at 2.6% annual rate in the fourth quarter, the Commerce Department said Friday. That was slower than the 3.2% it clocked in the third quarter and the 2.9% that economists expected.

A quick look under the hood shows that when it comes to demand, things are doing just fine. Personal spending grew at 3.8% rate, setting its fastest pace in three years, while capital spending growth hit 6.8%. The drags came from companies adding less to their inventories and an expansion in the trade deficit. Really, this just counts as a payback for the third quarter, when inventories and trade boosted growth.

The concern is whether demand will stay strong. Consumer spending has been regularly outpacing income growth and, as a result, people are saving less and less. The personal saving rate (the share of after-tax income that isn’t spent) fell to 2.6% in the fourth quarter from 3.3% in the third quarter. That compared with 6.1% two years earlier and was the lowest level since 2005, when the housing bubble was at its height.

The Journal's conclusion is "without wage increases spending growth will have to slow," and the economy with it.

Mixed Bag

Earlier today, in Weaker Than Expected GDP: Mixed Bag or Worse? I made this claim: "Despite all the crowing about consumer spending, recall that it is occurring only because of an unsustainable drawdown in savings."

An astute reader commented, "Don’t you expect a drop in savings when 10K people earning good money retire each day?"

That's a good point. And it is part of the picture, but only a part of it.

I replied "The other side is rising credit card and auto defaults and Millennials racking up purchases they cannot afford (24% still paying Christmas of 2016). The next set of [Christmas credit card] numbers is guaranteed to be worse."

Note the saving's spike in 2012 to 9.2%.

Were not hoards of boomers retiring then? What's the difference between then and now?

Wealth Effect

The difference between 2012 and now is the wealth effect from a booming stock market.

In 2005, people actually believed their home was their retirement vehicle and prices would rise forever. Today's widespread belief is stock prices only go up. In 2012, many retirees were concerned their stock nest egg would not last long enough.

Retirees can spend at will as long as they believe stock prices will rise more than their yearly needs.

Millennials who have few assets are not in the same boat. Millennials just need to believe they will have a job or alternatively they need to believe "the future is now so who cares?"

Haunting Math

Twilight Zone

Can Spending Drive the Economy?

  • In the case of millennials and those without assets, only as long as income keeps up with payments. Alternatively, only as long as a "What, Me Worry?" attitude persists.
  • In the case of retired boomers living in wealth-effect Fantasyland, only as long as sentiment towards equities lasts.

From a GDP perspective, spending (even government waste) is the economic driver.

More accurately, spending does not drive the economy. Production is the true driver.

Mike "Mish" Shedlock​


Debt is negative savings. When spending is driven by debt and not wage growth, the end result is a collapse in the personal savings rate.


The so-called savings rate does not measure the flow of real savings or the size of the pool of real savings.


It was my fault. I replaced my water heater in November instead of saving. I'll try to do better next time.


@Ron, my mistake! I should have said production in scale (after initial production - namely test marketing and product introduction). Introduction of the iPhone led to its demand and ramp up of production. If it had been a flop, there would have been no production thereafter. My larger point was the demand is fulfilled using debt, which is cheaply available. If debt were priced right, the individual might probably have saved some money and borrowed less to buy the same iPhone. Thus the demand has been moved forward by mispricing money and is therefore artificial at that point in time. What happens when you reach a stage when demand has been pulled forward to an extent that it leaves a void in the future . Also what happens when the debt is so large that debtor cannot pay it back or cannot borrow further. If it is a bank, bail them out is the thesis now