The NYT on the connection between savings and the economy's eventual recovery:
March 3, 2002
Rising Savings Could Mean a Weaker Recovery
By DANIEL ALTMAN
After a jagged descent lasting two decades, the personal savings rate of Americans may be moving in the other direction. Increased saving will help the economy to grow in the long run, but it could also dampen the recovery this year.
Though Wall Street's big investment banks have not reached consensus, several of them predict a strong increase over the next two years in the share of Americans' disposable income that remains unspent. The change may have already begun: on Friday, the Commerce Department reported that the savings rate for January was 1.8 percent, up from 1 percent in December.
Because spending stayed strong during the mild recession last year, most analysts never expected consumers to offer the economy much of a boost in the recovery. More saving would further weaken the rebound ? after all, the more you save, the less you consume.
"This is going to be an anemic recovery, and the increase in the saving rate is one key element as to why," said Stephen S. Roach, chief economist at Morgan Stanley. The firm expects the savings rate to jump to 2.9 percent by 2003, from 1.6 percent last year.
The rate moved up briefly in the third quarter, to 3.8 percent, as consumers, in part responding to Sept. 11, took precautions for rough times. But in the fourth quarter, the savings rate averaged a measly 0.5 percent, near the norm for the last couple of years. From 1959, when the data were first recorded, through the early 1990's, the monthly savings rate had dipped below 5.5 percent only once ? a blip in April 1987. But the rate has not been above 5.5 percent since 1995.
Economists offer several explanations for the low savings rate in the 1990's, but first among them is the unprecedented bull market. "We had this huge stock market boom that was fueling a massive increase in household wealth," said Frederic S. Mishkin, a business professor at Columbia University. "When you're wealthier, you need to save less."
Even during that boom, Mr. Roach added, many mutual funds popular with individual investors underperformed the overall stock market. "Consumers who have left it up to their mutual fund managers to stash away money for their retirement period will be up for a rude awakening," he said. "When the stock market bubble popped, the only asset left to provide saving to the consumer was the home."
WITH privately held retirement wealth on the decline, the spotlight may shift to public retirement funds. Last month, the Congressional Budget Office projected that the Treasury would dip into the Social Security trust fund's surplus every year through 2009 to close its fiscal gap. If savers start to worry more about Social Security, they will share a motivation with their counterparts in Japan, where savings rates have been high for years.
"The Japanese personal saving rate is high because people are concerned about the inadequacy of government saving," said Fumio Hayashi, an economics professor at Tokyo University. "People save in case the government cannot deliver its promises." The surplus in Japan's social security fund, he explained, was not enough to pay for benefits owed to future retirees. The United States is heading down a similar road.
A surge in saving would offer workers some insurance against a less-than-luxurious retirement, but it would also offer the economy much-needed funds for investment in the long term.
"There's an issue of the long run versus the short run," Professor Mishkin said. "When you're in a recession, what you'd like to have happening is the saving rate still staying low. But from a longer-run perspective, what we'd like to see is saving at a higher level."
Professor Mishkin noted that the low savings rate had not severely curtailed investment ? yet. "We've had to depend on the kindness of foreigners, and that can't go on forever," he said. " One of the things you would like to see is that household savings actually sustain the funds for investment."
Not everyone is expecting an increase in personal savings. "We are impressed with the resilience of the consumer, which has led us to be a little bit more open-minded about exactly how quickly the wealth effect is going to work its way through," said Edward F. McKelvey, a senior economist at Goldman, Sachs, which forecasts a savings rate of 1.4 percent for the next two years.
The strong supply of credit to consumers could continue to make spending more attractive, Mr. McKelvey added. "There have been plenty of ways for consumers to get their hands on money if they've wanted to spend."
AI
