The Return of Saving

THE U.S. SAVINGS RATE AND THE GLOBAL ECONOMY

The savings rate of American households has been declining for more than a decade and recently turned negative. This decrease has dramatically reduced total national savings despite a rise in corporate saving. In 2003 and 2004, the combined net savings of households, businesses, and government were only about one percent of gross national income -- the lowest level in at least 50 years.

This sharp decline in saving has had important implications for the United States and for the global economy. It has reduced productivity-enhancing net business investment in the United States to less than four percent of GDP and made the United States increasingly dependent on capital from the rest of the world to finance that investment. At the same time, the decreased national savings rate -- and the increase in consumer spending that it implies -- has induced a rise in U.S. imports. Those imports have contributed to the growth of output and employment in many countries around the world.

The downward trend in U.S. household saving will likely soon be reversed. In the long term, a substantial rise in household saving will have a positive effect on the U.S. economy. But the initial effects will pose problems for the United States and its trading partners. If these effects are not managed well, the result could be declines in output and employment and a corresponding rise in U.S. protectionism.

HOME ECONOMICS

To appreciate the significance of these developments, it is helpful to have a more precise definition of net household savings. Household saving is the difference between what households receive in after-tax income (including wages, salaries, fringe benefits, interest, and dividends) and what they spend on goods and services. Those savings can take the form of bank deposits, purchases of financial assets such as stocks and bonds, or investments in real assets such as homes and unincorporated businesses. Contributions to individual retirement accounts (IRAs) and 401(k) plans as well as employer contributions to defined-benefit pension plans are also counted as household savings. So too is money used to pay down a mortgage or other loan. Borrowing is counted against saving, unless the borrowed funds are used to purchase financial assets or are converted into other types of savings.