Personal 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.