Record plunge in personal savings in the United States, will it cause a recession?

This allowed households in the United States to save extraordinarily. However, after the opening of economic activities, families began to spend everything they had saved.

Savings returned to ranges considered ‘normal’, but plummeted rapidly in 2022 due to the effect of historic inflation in the United States, which had months at levels not seen in 40 years -in June 2022, inflation exceeded the 9% annually in the United States, while in Mexico it reached its peak in August and September, with an annual increase of 8.7%.

Does the drop in savings portend a crisis?

Not necessarily. Despite the fact that the savings rate fell to 2.3% in October 2022, according to the most recent Federal Reserve report, some experts pointed out that this is not an unequivocal sign of a recession for this reason.

It is the lowest level since July 2005, two years before the great financial crisis of 2008-2009. For this reason, Nick Gerli, CEO and founder of Reventure Consulting, stated on Twitter that this will imply a collapse in American consumption by 2023. And that, as a consequence, a recession could be expected.

However, this estimate may not yet be entirely accurate, according to Arabinda Basistha, an economics expert at the University of West Virginia, who was consulted by The Conversation.

The economist indicated that there are periods with a low savings rate and that, precisely, the drop to 2.3% in 2005 happened after almost five years in which the rate was 3%, so it was not a dramatic drop.

However, the historic fall that began in October 2022 is a piece of information that cannot define whether the saving habits of Americans are changing in the medium or long term. In fact, the common thing is that these habits do not change so much or so drastically.

That is, there would have to be a longer period of low savings to really assess how much a demand-side recession might foster. Added to this, delinquency levels – the degree to which Americans default on their loans – are still the lowest they have been since the 1980s.

Finally, the American debt burden as a proportion of the size of the economy is also at relatively low levels, at 76%, until June 2022. When in the period of the great crisis (2007 to 2009) it reached almost 100 %.

For these reasons, it is still difficult to determine whether the drop in savings rates will be causing a crisis in the short term.