By Paul Kiernan
From the 1980s through 2007, household saving followed a
predictable pattern. It typically rose after a recession as people
paid down debt and rebuilt balance sheets, then declined as they
grew more optimistic -- and spendthrift.
That hasn't happened during the current expansion. The
personal-saving rate, the portion of after-tax income that
consumers don't spend, rose from 3.7% in 2007, at the height of the
housing bubble, to 6.5% in 2010, the year after the recession
ended. But since then, rather than falling, it has drifted up, to
an average 8.2% in the first seven months of 2019. That is higher
than the average for any full year since 2012, when incomes spiked
as companies pulled forward dividend and bonus payments to beat a
tax increase.
"That is evidence to suggest that something structural has
changed, and it's made the saving rate kind of sticky at higher
levels," said Tiffany Wilding, a U.S. economist at Pacific
Investment Management Co.
Saving, which is the slice of paychecks, dividends and other
earnings that Americans sock away, was up 17% in 2018 from the
previous year, according to recently revised figures from the
Commerce Department, beating consumer spending's 5.2% and business
investment's 7.8%.
"The timing is no coincidence," says Paul Ashworth, chief North
American economist at Capital Economics. "The tax cuts seem to have
been saved." He notes the saving rate jumped by a full percentage
point in January 2018, the month after President Trump signed the
Tax Cuts and Jobs Act into law.
Economists point to other factors as well, including greater
caution among consumers scarred by the 2007-09 recession, aging
baby boomers preparing for retirement and a widening gap between
the rich (who save a lot) and the poor (who save little).
Higher saving can be positive when it represents prudential
behavior, for example preparation for retirement. It can also act
as a cushion against recession. Rainy-day funds enable consumers --
who account for two-thirds of economic output -- to continue
spending despite a job loss, reduced hours or slashed bonuses.
But whether savings serve as a recession cushion depends in part
on how they are distributed. Wealthier Americans are less likely
than middle- and lower-income families to change their spending
patterns after a windfall such as a tax cut or a setback such as a
recession.
"If you're a billionaire, and you find $100 on the street,
you're probably not going to rush off to Walmart to spend it," says
Ian Shepherdson, founder of Pantheon Macroeconomics. "But if you've
got no money, and you find $100 on the street, you are going to
rush off to spend it."
While the latest saving data aren't broken down by income, some
economists say the recent rise is likely being driven by the
wealthy. Mark Zandi, chief economist at Moody's Analytics,
estimates that the wealthiest 10% of Americans accounted for more
than three-fourths of the increase in the saving rate since the tax
cut.
That cut increased after-tax incomes of the upper one-fifth of
households -- those making at least $149,400 a year -- by 2.9%,
versus 1.6% for the middle fifth and 0.4% for the bottom fifth,
according to the Tax Policy Center, a research group.
Joe Norflus, a retired investment banker in Essex Co., New
Jersey, whose income consists mostly of dividends and interest,
said he benefited from the law's lower tax rates and saw his net
worth rise. But the earnings boost was "fairly insignificant"
relative to his overall net worth, so he used it to increase his
savings.
"The tax cut didn't impact in any way, shape, or form my
spending habits, " Mr. Norflus said.
On the other hand, economists say lower taxes did appear to
boost spending by lower- and middle-class families last year. One
sign: Sales were up 11% at discount retailers tracked by Redbook
Research, compared with 3.4% at department stores.
Regardless of the cause, if saving outstrips investment
opportunities for a long time, some economists say, it can hold
down interest rates, inflation and economic growth. Such "secular
stagnation" may leave less room to cut interest rates, making it
harder for the Federal Reserve to boost growth during
downturns.
"Rather than being a virtue, saving becomes a vice," said Gauti
Eggertsson, an economist at Brown University.
Mr. Ashworth said the data for a long time didn't back the
argument that rising inequality would boost saving and weigh on
growth. That case looks stronger now that revisions have raised the
saving rate, he said.
Write to Paul Kiernan at paul.kiernan@wsj.com
(END) Dow Jones Newswires
September 22, 2019 08:14 ET (12:14 GMT)
Copyright (c) 2019 Dow Jones & Company, Inc.