Experts differ on whether drop in personal savings rate is ominous

After squirreling away cash at record rates during the pandemic, Americans have taken a hard turn in the opposite direction, with the personal savings rate dropping to a 17-year low of 2.3% in October.

And credit-card balances are again on the rise following an early-pandemic dip, hitting an all-time high of $931.7 billion in November.

But economic observers offer different views about whether these metrics are cause for concern—partly because of the ways the pandemic has scrambled the economy for almost three years now.

“They’re a natural product of what we’re going through,” said Phil Powell, clinical associate professor of business economics and public policy at Indiana University’s Kelley School of Business at IUPUI. “I don’t see them as threats. They’re a reflection of other things.”

Powell also serves as academic director of the Kelley School’s Indiana Business Research Center.

The personal savings rate reflects saving as a percentage of a person’s disposable income. According to the U.S. Bureau of Economic Analysis, the personal savings rate largely hovered between 5% and 10% for the decade leading up to the pandemic.

The rate spiked to an all-time high of 33.8% in April 2020 amid stay-at-home orders and an initial $1,200 stimulus check that was issued to eligible Americans that month. The savings rate dipped back below 10% beginning in mid-2021 and has been below 5% all this year. October’s rate dipped to 2.3%, its lowest level since July 2005, when it was 2.1%.

Michael Hicks, director of the Center for Business and Economic Research at Ball State University, said the decline in saving and the rise in credit-card debt “are two things I think everybody would say are a little bit worrisome,” but not as much as they might have been pre-pandemic.

That, Hicks said, is because many households are still working through the savings they accumulated during the pandemic. So even if they have more recently cut back on the amount they’re putting into savings, many Americans still have healthy savings balances.

According to a research report issued in October by the Board of Governors of the Federal Reserve System, U.S. households accumulated $2.3 trillion in excess savings from 2020 to the summer of 2021—savings above and beyond what would have been expected given pre-pandemic trends. Since late last year, households have run through about a quarter of those excess savings, the report says.

Myles Grote, venture launch manager at Indianapolis-based High Alpha Innovation and founder of Indianapolis venture firm Omnidollar Ventures, is more pessimistic about what the drop in saving and growth of debt suggests.

“I think that [consumers] are cutting into those savings and also increasing debt at record levels,” Grote said. “I think it’s a rather ominous sign for what could be to come.”

In his view, the prolonged period of low interest rates, coupled with the stimulus payments over the past two years, gave people “a taste of the good life” that fueled “excessive lifestyles” and spending, particularly among young people who have not experienced a prolonged economic downturn as an adult.

Grote, along with others, also acknowledged that inflation has driven some to deplete their savings and lean on credit just to cover daily expenses.

“The story for lower-income households is quite different,” Powell said, from the optimistic picture he predicted for the broader economy.

And not every household has had the luxury of accumulating extra savings over the past two years, he said. Lower-income households might have used COVID-19 stimulus checks to catch up on bills rather than put them in a savings account.

David Golder, a financial coach who works at the John Boner Neighborhood Centers, on East 10th Street, offered a similar take.

Golder does one-on-one coaching with low- to moderate-income people seeking help with tasks like financial-goal setting, rebuilding credit, investing, and retirement planning.

He identified inflation as a top reason people might be saving less and using their credit cards more, maybe even dipping into savings to cover basic expenses. “People are finding it really hard to save because it’s more expensive at the grocery store, more expensive at the pumps.”

Golder also shares the view that the pandemic created new economic dynamics that are still playing out. “This is all new for everybody.”

Specific to the job market, he said the pandemic disrupted the number and type of jobs available. “A lot of the same opportunities aren’t there. There are a lot of new opportunities, but they require different skills, different experience.”

IU’s 2023 economic forecast lays out two possible futures, Powell said.

In the optimistic scenario, the economy sees growth of 1% to 1.5% next year, with unemployment up about 1% from its current 3%. In the pessimistic scenario, the economy shrinks up to 2% and unemployment rises about 3%.

The big factor that will determine what happens, Powell said, is whether consumers continue to spend money. If spending slows, so will the economy.

Predictions are difficult because data has its limitations, and multiple situations might be playing out within that data, Hicks said.

For instance, he said, the rise in credit-card debt and the decline in savings means “there are likely a number of households that are building themselves up for real financial problems in the future.”

But it’s also likely that some households took advantage of low interest rates to make major purchases on credit last year, making only minimum payments while interest rates were low. Now that interest rates are on the rise, Hicks said, those households might be choosing to use their discretionary income to pay down debt rather than put it into savings. “That family is making normal consumer finance decisions that are not indicative of financial distress.”

And because different data sets are released on different timetables, and data always lags behind the present day, it’s possible that U.S. credit card debt is already on the decline, he said.

To put it another way: Economic data is nuanced, and it’s not always possible to draw obvious conclusions from the numbers.

“That’s what makes economics hard,” Hicks said.•