Why Did Saving Go Out of Style in the US?
Diccon Hyatt
Oct. 12, 2023
Economists are grappling with a strange quirk of the post-pandemic economy: Consumers in the U.S.—and only the U.S.—are spending away the money they saved up in 2020 and 2021.
KEY TAKEAWAYS
- Consumers in the U.S. are saving less than they did before the pandemic, whereas the opposite is the case in other advanced economies.
- Economists lack clear answers why people in the U.S. are behaving differently than in other countries.
- One possible reason: much of the pandemic-era savings windfall in the U.S. came from government relief payments, which people may be more willing to spend than money they earned.
It turns out that Americans are unique among residents of highly developed economies. Residents of Western Europe, Japan, and Canada are now saving more of their disposable income than they did before the pandemic and those in the U.S. are saving less, according to an analysis by economists at the Federal Reserve Bank of New York released Wednesday.
In every country, savings rates surged during the pandemic, but only in the U.S. did savings rates fall below pre-pandemic levels after 2022, as the chart below shows.
Chart: Inestopedia Source: Federal Reserve Bank of New York
The pandemic-era savings surge is easy to explain: Business closures forced people to curtail their spending at the same time that governments, especially the U.S., supported households with stimulus checks and other forms of financial relief. In the U.S., savings rates have since plummeted below normal levels, suggesting a willingness among consumers to spend that extra money, what economists call “excess savings.”
Many economists have cited those excess savings as the reason U.S. consumers have kept on increasing their spending despite inflation and high-interest rates. Those financial pressures have squeezed household budgets in recent years and savings have supported surprisingly resilient economic growth in the U.S. compared to other countries.
NY Fed researchers Thomas Klitgaard and Matthew Higgins admitted there was no clear reason why U.S. consumers are behaving so differently from people in other countries. However, they did propose a theory.
“One possibility is that consumers are more willing to spend down excess savings when it comes from unexpected income windfalls, such as, in the U.S. case, large government transfers,” they wrote. “The idea, based on prospect theory, is that government transfers are ‘unearned’ and thus less valuable and easier to spend.”
The concept of “excess savings” may seem absurd to anyone living paycheck-to-paycheck, for whom the stimulus checks of 2020 and 2021 are a distant memory. Some economists feel the same way.
For example, economists at Wells Fargo Securities last week said they would no longer focus on estimating how long “excess savings” would last in their reports since it had stopped being a useful way to gauge the health of consumers’ pocketbooks.
“For many households, the excess savings is long gone,” Tim Quinlan, Shannon Seery, and Jeremiah Kohl, wrote in a commentary. “For others, especially wealthy ones, it can last much longer. If you don’t draw the money down, it can last indefinitely.”