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.
