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Federal Reserve, the Economy and CD Rate Forecast - Aug 2, 2022
Fed Meeting: Second Straight 75-bp Rate Hike - Strategies for SaversPersonal Savings Rate Spikes in April - Effect on Deposit Rates
The U.S. Bureau of Economic Analysis (BEA) released its monthly Personal Income and Outlays report this morning. What is particularly noteworthy is the massive surge in the personal savings rate. This is a measure of how much Americans are saving, and the rate has surged to an all-time record high of 33.0% in April. The personal savings rate had a large increase in March, rising from 8.2% in February to 12.7%, but the April increase is unprecedented.
History of the personal savings rate
You can see the history of the personal savings rate in this chart from the Federal Reserve Bank of St. Louis. A portion of the chart from 2000 to this April is shown below. The grey zones are the periods when the U.S. was in recession. You can see a few spikes in the personal savings rates, especially during and after the two recessions. However, these past spikes pale in comparison to the current spike.
The current spike in the personal savings rate is understandable as the effects of the COVID-19 pandemic have caused a larger percentage of Americans to stay home and reduce spending. In addition, job losses and the worries of job loss may have also caused people to save more and focus on building up their emergency fund. As the shutdowns end and the economy recovers, the personal savings rate should come down. It may not come all the way down to its past averages. If the pandemic and the economic slowdown that results have a lasting impact on Americans, it may take awhile for the personal savings rate to fall to its previous averages.
Personal savings rate and deposits
Saving more money should be considered a virtue, but when the overall savings rate increases, there is a downside for savers. Much of that extra savings goes into banks, increasing their deposits. That puts downward pressure on deposit rates since banks don’t need to attract deposits with high interest rates.
This data from the Federal Reserve shows the large growth in deposits this year. Row 34 of the Table with the title “Assets and Liabilities of Commercial Banks in the United States” lists the deposits from 2019 and 2020. Deposits from commercial banks have increased from $13.3 Trillion in January to $15.3 Trillion on May 13th, an increase of 15%. According to this American Banker article:
On a week-to-week basis from mid-March to late April, deposits grew at a clip never before seen in available Federal Reserve data.
The record level of deposit growth is likely contributing to the fall of deposit rates that we’ve seen in the last three months. As I reported on Tuesday, online banks have been cutting their 5-year CD rates to all-time lows.
Future of personal savings rate, deposits and interest rates
The record high personal savings rate and the record high deposit growth shouldn’t continue for much longer. As you can see in the above personal savings rate chart, a surge in the savings rate is always followed by a big drop. As the economy recovers, many Americans will likely go back to overspending and undersaving. That will bring down the deposits at the banks, and the banks will feel pressure to increase deposit rates even if the Fed is holding the federal funds rate at near zero. Before the pandemic, Ally Bank’s 5-year CD yield fell to a low of 1.50% in June 2013. By September 2014, the 5-year yield was up to 2.00%. The Fed didn’t start to hike rates until December 2015. If the economy has a strong recovery in the second half of this year, the environment will hopefully become more favorable for higher deposit rates in 2021.
1. Many people sold massive amounts of stock as the market went south just recently and are probably still on the sidelines.
2. The stimulus checks just got automatically deposited directly into savings accounts.
3. The draconian lock downs made it nearly impossible for people to spend at normal levels.
Two points:
1. That is a good question and I think the answer is:
PSR= (GI-T-SP)/(GI -T)
Where:
PSR= Personal Savings Rate
GI= Gross Income
T=Taxes
SP=Spending
GI-T is called “Disposable Income.” It’s the income you have left after taxes.
You spend some of it and you save some of it. So each portion of that (spending or savings) can be expressed as a percentage of the Disposable Income.
The Personal Savings Rate is the portion that is allocated to savings.
2. Reduced spending isn’t the only thing that can increase the savings rate.
Decreased disposable income can also increase the savings rate. I suspect that the latter had more influence on the savings rate spike in these past months than the former. Yes, people stayed at home somewhat decreasing their opportunity for spending. But a quarter of the workforce was out of work and small businesses were required to completely shut down their operations. And only a portion of those losses were made up with government wealth redistribution.
So I think that plunging household income is likely a bigger factor in the savings rate spike than reduced spending.
But most of the major household expenses are fixed and cannot be avoided.
So also I think much of the increase in savings isn’t savings at all, it’s only deferred expenses (for example temporary mortgage or rent forbearance which is now mandated by law). So I think the “Personal Savings Rate” statistic is a bit of a mirage. It’s more about falling income and deferred expenses than any sudden propensity for spenders to suddenly repent for being subsidized by savers and become savers themselves. No such luck.
I wouldn't discount decreased spending as much as you appear to be. It's not easy to spend money when you aren't allowed to do the things you normally spend your money on. so That's very much a large component of the savings spike, and lack of spending also factors into all the other components of the spike.
Take, for instance, the delayed expenses (things like mortgages and student loans and other bills that are being kicked down the road). Those all normally take a big bite out of people's weekly income, without that bite, what are people going to do with the money that normally goes to those expenses? We just got done talking about the lack of spending opportunities, so what's left if you aren't spending? stashing it away in savings until those delayed bills come due.
Toss on top of that lots of government money (stimulus checks & unemployment checks that are bigger than a workers normal paycheck) with not many places to spend it and you have a "perfect storm" for temporarily spiking the savings rate.
I think that plunging household income
while there certainly are households whose income have plunged, thanks to the government wealth redistribution, there's also many households whose incomes have increased (stimulus plus unemployment payments that are larger than their normal paychecks or stimulus plus normal paychecks for those who are still working in jobs or areas that haven't been shutdown as well as people whose pay actually increased due to the opportunity to pick up more hours of work because they are in an "essential" business that's actually saw an increase in demand for their services) with pretty much nowhere to spend that extra money.
sudden propensity for spenders to suddenly repent for being subsidized by savers and become savers themselves. No such luck.
agreed. This isn't a change in the fundamental spending/saving habits of the people, it's a temporary condition as a result of events beyond their control. As conditions change such that they can go back to their old spending habits, they pretty much will. it's just a matter of when that can happen.
But they are not savings, they are deferred expenses.
So a large part of what is being counted as savings is not savings at all. It's simply deferred spending.
Unless they're spending that money on something else, it's both. They're saving *now*, they'll be spending *later*. It's a temporary saving, which is why the "spike" is mostly a mirage. It's not a fundamental change in habits, it's a temporary set of circumstances.
But in accrual accounting, what distinguishes the asset (in this case "savings") from deferred spending is that deferred spending comes with an associated liability, both of which go on the books at the same time. The liability in this case would be unpaid rent due, or unpaid mortgage payments, etc.
So there is a difference between savings that has not yet been allocated to any use and savings that is allocated to an already incurred liability.
"Personal Savings" is only part of the balance sheet. It ignores personal liabilities. So since personal liabilities are piling up at the same time, that "savings" is already effectively spent. It just hasn't been removed from their bank accounts yet. Therefore I think the savings rate is very misleading and doesn't tell us much especially in this case where people are receiving taxpayer redistributions , loan forgiveness and debt forbearance at unprecedented levels. Those things significantly distort this statistic.
I have to disagree with the idea that deposit rates are experiencing downward pressure because the savings rate is up (not even sure I agree it is up).
I think the main reason deposit rates are tanking is the lack of demand for loans.
A quarter of the workforce is out of work. Corporate and small business bankruptcies are surely going to reach record levels. Credit cards are being cancelled. Credit ratings are being slaughtered. People can't pay their existing mortgages let alone qualify for a new one. Businesses that are shut down aren't thinking about borrowing money to expand. Banks don't need more money if they don't have anyone to lend it to. Why should they pay a higher rate for money they don't need?
I think that is a much bigger factor in the low deposit rates than a dubious increase in the REAL savings rate.
This to me is actually good news economically speaking because it means that people actually have savings unlike the housing crisis where the savings rate dipped negative. Look how long it took the economy to recover from that. This economic recovery could end up being the fastest on record only time will tell for sure but it certainly can't hurt when consumers have money to spend.
Taxpayers are going to have to pay back the money the government handed out. That will currently increase the savings of those who received the government checks but will reduce the savings of taxpayers when they have to pay for it.
It's a redistribution of wealth, not the creation of wealth. It's taking water out of one end of the pool and pouring into the other while claiming you are filling up the pool. Another perspective on how the savings rate statistics are not what they are purported to be.
If you have $10,000 in "savings," and owe $5,000 in rent that is already due but you have not paid yet, then only $5,000 of that "savings" is available for future spending, not $10,000.
So the amount of "savings" really doesn't tell you much, especially when rents, mortgages and other expenses are not being paid and personal liabilities are growing.
A month of saving still earns a month of interest (at whatever the current saving rate is) regardless of whether that savings is committed to an expense next month or not.
I do agree however, that the amount of savings doesn't tell you much in and of itself, as it's just one variable among many. As I said the current spike is mostly mirage because it's not savings due to a chose change in behavior, it's savings to due a temporary set of circumstances. Once circumstances change, savings rates will drop back to "normal" levels.
40 million people have fallen out of the workforce. For most of them their only significant source of income is a government check. So anything they are "saving" might look like savings to them, but to everyone else who pays taxes, or to whom they owe money that is not being repaid as promised, it looks more like spending of their money. And even that "savings" is not going to last very long when the checks stop coming.
I don't think an increase in the savings rate by that means is a good thing for bank depositors or anyone else (with the possible exception of those who are receiving the payments, but in the long run I think it will even make them worse off too). I agree that what's going on is not a good thing for bank depositors. But I don't interpret the increase in the "savings" rate as good for anyone else either.
The real danger point comes when the government checks are scheduled to stop. What then? Mass defaults leading to a failure of the banking system? A perpetual welfare state? This is the real risk not only to bank depositors but to the entire economy.
Personal income rose 10.5% in April driven solely by an 89.6% gain in government transfer payments. Wages and salaries fell 8% in April after a 3.5% decline in the prior month.
The rise in incomes and the drop in spending pushed the savings rate up to 33% in April from 12.7 in the prior month.
The bandaid has, in net, made Americans wealthier. Similar to some unemployed workers that collect more benefits than when they were working. There has been too much liquidity added to the market.