Economic SYNOPSES

short essays and reports on the economic issues of the day

2009 I Number 46

Personal Saving and Economic Growth

Daniel L. Thornton, Vice President and Economic Adviser

he U.S. personal saving rate increased to nearly 5 a simple observation. Nevertheless, the direction has been percent in the second quarter of 2009. Although positive. saving has its advantages, many analysts fear that a That personal saving and growth are likely to be posirising saving rate could hamper the economic recovery: tively related in the long run does not preclude the possibilConsumer expenditures are such a large component of ity that a higher saving rate can slow economic growth in aggregate demand that even a small decline in consumption the short run. To investigate this possibility, we calculate could have a noticeable effect, and more saving means less the simple percent correlation between the saving rate in consumption. We look at the data on the U.S. personal the current quarter and the growth rate of output in the current quarter and in the next eight quarters. This is shown saving rate and GDP growth since 1948 for some insight in the table. into how likely it is that increased personal saving will slow economic growth. The chart shows both the quarterly U.S. personal saving Many analysts fear that a rate (personal disposable income less personal outlays) and the annualized growth rate of real gross domestic product rising saving rate could hamper (GDP) over the period 1948:Q12009:Q2. The personal the economic recovery. saving rate increased from about 6.0 percent in the late 1940s to a peak of 12.5 percent in 1975:Q2, then declined to 1.2 percent by 2007:Q4, and has since increased to 4.9 The correlation is about 5.5 percent in the current percent. Over these same periods, output grew at 3.8, 3.2, quarter, increases monotonically to 15 percent six quarters and 2.4 percent rates, respectively. Most economists believe that long-run economic growth is directly 20 Personal Saving Rate linked to economic fundamentals Growth Rate of Real GDP such as the stock of capital, techno15 logical innovation, trade policies, government tax policies, and so on. 10 A higher saving rate does mean less consumption, but it could also result 5 in more capital investment and, ultimately, a higher rate of economic 0 growth. In this respect, it is interesting that the growth rate of real GDP 5 has been higher on average when the personal saving rate is rising than 10 when it is falling. Of course, it would be incorrect to conclude that the 15 higher saving rate was responsible for the faster economic growth, because SOURCE: Bureau of Economic Analysis/Haver Analytics. many things that affect economic growth are not accounted for in such
1948:Q1 1949:Q2 1950:Q3 1951:Q4 1953:Q1 1954:Q2 1955:Q3 1956:Q4 1958:Q1 1959:Q2 1960:Q3 1961:Q4 1963:Q1 1964:Q2 1965:Q3 1966:Q4 1968:Q1 1969:Q2 1970:Q3 1973:Q1 1971:Q4 1974:Q2 1975:Q3 1976:Q4 1978:Q1 1979:Q2 1980:Q3 1981:Q4 1983:Q1 1984:Q2 1985:Q3 1986:Q4 1988:Q1 1989:Q2 1990:Q3 1991:Q4 1993:Q1 1994:Q2 1995:Q3 1996:Q4 1998:Q1 1999:Q2 2000:Q3 2001:Q4 2003:Q1 2004:Q2 2005:Q3 2006:Q4 2008:Q1 2009:Q2

Economic SYNOPSES
Percent Correlation
(current quarter) 0 1 5.54 5.75 2 6.20 3 8.73 4 8.90 5 13.13 6 15.00 7

Federal Reserve Bank of St. Louis

8 12.05

13.13

ahead, and then declines. All correlations are positive, suggesting that a higher saving rate in the current quarter is associated with faster (not slower) economic growth in the current and next few quarters. However, these correlations are relatively small, suggesting that the relationship is rather weak. Again, it would be incorrect to infer a causal relationship here, but these correlations suggest that

any possible negative effect of higher saving rates on short-run economic growth has been consistently offset by the positive effect of other factors. Hence, a simple analysis of these data does not support the view that the recent rise in the personal saving rate will impede the economic expansion that appears to be under way. I

Posted on December 17, 2009 Views expressed do not necessarily reflect official positions of the Federal Reserve System.

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