Recent research from the Federal Reserve Bank of New York reveals an interesting trend: while savings rates increased in major high-income economies across the world during the Covid-19 pandemic, Americans have taken a different approach. In the United States, it appears that households have a tendency to spend down their savings, which sets them apart from their global counterparts.
From 2020 to 2021, developed nations such as the United States, Europe, Canada, the United Kingdom, and Japan experienced an increase in saving rates by 6.5 to 10 percentage points. These higher savings habits have remained in countries like Canada, where savings rates continue to be 3.5 percentage points higher than before the pandemic.
However, the situation in the United States tells a different story. While other comparable countries still have savings rates above pre-pandemic averages, the U.S. has seen a considerable decline, now falling below the average rates seen from 2015 to 2019. From the start of 2022 until the second quarter of this year, the average U.S. saving rate has dropped by 2.5 percentage points from pre-pandemic levels, reaching 3.9% in August, according to the Bureau of Economic Analysis.
The distinct difference in post-pandemic savings habits between the U.S. and other developed nations has left researchers scratching their heads. The reasons for this divergence remain unclear. What is clear, however, is that higher savings rates typically indicate better financial health for households, enabling them to handle unforeseen financial emergencies without resorting to borrowing or going into debt. The decreased savings among Americans suggest that households are relying more on credit than they were during the pandemic. This reliance on credit could potentially lead to a decrease in consumer spending, which is a significant driver of the U.S. economy.
The Unexpected Trends in American Savings Habits
While economic downturns or weak economic health often lead to increased savings rates, the United States is experiencing a rather unusual phenomenon. Despite consistently low consumer confidence levels, savings in the U.S. remain lower compared to other similar economies. This defies the expectations of researchers who predicted the opposite outcome.
The Council of Economic Advisers has reported that U.S. inflation, although high, is actually the lowest among G-7 nations. This may suggest that inflation is not the primary driver of the differences in savings rates observed across countries. It is clear that the impact of inflation on real wage gains and purchasing power has been detrimental, but it does not fully explain the lower savings levels in the U.S.
Researchers have proposed an alternative explanation for this phenomenon. They suggest that American consumers have been more inclined to spend the “free” stimulus money provided by the government during the pandemic. Even after this temporary boost in income expired, spending continued at a steady pace. According to their theory, government transfers are seen as “unearned” and therefore less valuable, making them easier to spend.
During the pandemic, higher savings rates in the U.S. were a result of both increased income from government stimulus and reduced spending. However, in other countries, excess savings were primarily driven by reduced spending alone.
It is worth considering that many comparable nations have stronger social support systems in place, providing households with more opportunities to save. For instance, healthcare expenditures in the U.S. amounted to $12,914 per capita in 2021, significantly higher than the £4,188 ($5,111) per person spent on healthcare in the U.K. This disparity in expenses could also contribute to the divergence in savings habits.
Regardless of the underlying causes, it is evident that Americans’ savings habits have not improved post-pandemic. This could potentially make households more vulnerable to economic and financial shocks.
