The personal savings rate in September reached its lowest level since 2007. And while it hasn’t reached its all-time low, the trend is definitely downwards. Personal savings are now at 3.1 percent of income, still slightly higher than the 2.5 percent low reached in December of 2007.
Looking back at historical savings data since 1960, the savings rate had normally hovered around 10 percent. After some brief spikes during the 1970s, the savings rate commenced a long-term decline beginning in the early 1980s. That time frame, not coincidentally, occurred alongside what many experienced financial market observers have called a long-term bond bubble. The easy money policies embraced by the Federal Reserve have led to both lower interest rates and a lower personal savings rate.
While the personal savings rate experienced a spike back up above 10 percent in the aftermath of the financial crisis, that was only temporary. There are a number of possible reasons for the savings rate dropping so low recently.
On the one hand, rising stock markets could be driving up Americans’ investment account values. With stock markets having risen 50% in only about 20 months, some investors may not see the need to invest as much money as they might have in the past because they feel like they’re better off. On the other hand, rising housing prices could mean that people are spending a larger portion of their paychecks on rent and mortgage payments, resulting in less money left over at the end of the month to save and invest.
Remember too that total domestic debt is up to nearly $48 trillion, 60% more than it was a decade ago. And aside from stock markets recently, there haven’t been too many great options for saving and investing since the financial crisis.
Regardless of the cause of the drop in the savings rate, the fact that it continues to drop is a bad omen, as it very often indicates that the underlying economic conditions are ripe for an economic downturn. Investors would be wise to take warning and prepare for rough economic conditions ahead.