The Net National Savings Rate Takes A Swoon

The net national savings rate measures the amount of income that households, businesses, and governments save. It is an economic indicator tracked by the U.S. Commerce Department's Bureau of Economic Analysis (BEA). Although not considered one of the "prime time" leading economic indicators, the savings data is relevant and has implications for all businesses and investors. A disturbing fact is that the net savings as a percentage of gross national income has been negative since the first quarter of 2023 after starting a decline in the fourth quarter of 2020. The current period of negative net savings is only the third time that net savings slipped into negative territory in the last 75 years. The only other time net savings has gone negative is in the lead-up to the Great Recession (2007-2009) and during the brief Covid-19 recession (2020). A rapid drop in the net savings rate virtually always indicates the U.S. economy has either entered a recession or will soon enter one. It would not surprise me to ultimately learn that we are in recession as I write this blog. A lag for announcing a recession is not unusual. For example, the National Bureau of Economic Research (NBER) declared in December 2008 that the United States economy entered a recession in December 2007.

The primary culprit for the slide into negative territory in terms of the national savings rate would of course be Uncle Sam. The federal government has been operating at a fiscal deficit for over a quarter century now. The past few years have been particularly disconcerting as the government went on a spending binge while tax revenues remain weak. The Covid-19 pandemic and the development of the "green" economy serve as excuses for our government to accumulate limitless debt. The percent of disposable income saved by Americans has likewise reached disturbing levels. The personal saving rate in the U.S. averaged 8.45% between the years 1959 and 2024. The rate currently stands at 2.90%. Consumer spending has been robust and this has kept the economy plugging along. The American consumer is about to hit the wall, however.

Soaring inflation in the wake of the pandemic makes it harder for lower and middle-income earners to make ends meet. The cost of goods and services has increased a minimum of 25% since January 2020. Income has not kept pace. Everyday expenses are being funded by dwindling cash reserves and increased levels of personal debt. Credit card debt stands at an all-time high of $1.14 trillion (average interest rate of 21%) as individuals use cards to fill in budget gaps. Delinquencies and bankruptcies are steadily increasing. Due to reduced savings, most Americans won't have as much at their fingertips come a downturn or a shock that leaves them more financially vulnerable. Because of the precedent set by direct distribution of checks to most Americans during the early days of the pandemic, I expect they may be expecting and looking for a bailout when the economy tanks.

Next, we'll look at the long-term ramifications of a low or negative national saving rate. Spoiler alert - there is nothing positive about a scenario of that nature. The purpose of savings is to allow a country to finance its investment needs with its own resources. Investments are generated through savings. Household savings can be a source of borrowing for government to provide funds for public works and infrastructure improvements. Any deficiency in net national savings must be filled by foreign capital to make up the difference between net U.S. investment and net U.S. domestic savings. At negative net national savings, the United States is eating into its capital stock instead of adding to it. This cannot go on for long without putting the American economy at the mercy of the international capital markets. But here's the catch - where will all of the capital come from? Investors from China are no longer welcome on American soil. At present, Europe lacks sufficient savings to replace China as a source of capital.

Wrapping things up, it should be reiterated that an economy is dependent upon savings to grow, be vital, and provide prosperity for the participants of a nation's economy. Another financial crisis, perhaps equal or worse than the Great Recession (2007-2009) will eventually enfold on the U.S. economic landscape. History tells us that the countries with the highest savings rates before this nasty recession, were also the ones that were less affected by it. I anticipate this particular correlation will repeat.