Reuven Glick and Kevin J. Lansing of FRBSF write on the topic in this short note. They say savings rate has increased mainly because of decline in credit available to households. Pre-crisis, savings rate declined to 1% levels mainly because of easy credit conditions. And after the crisis, savings rate has risen to 6% as credit to HH has declined.
Following a 20-year decline, the U.S. personal saving rate bottomed out at around 1% in the third quarter of 2005. Since then, the rate has been trending upward, reaching around 6% in the third quarter of 2010. The era of declining saving rates coincided with a period of expanding credit availability for households that contributed to a dramatic increase in leverage as measured by the ratio of household debt to personal disposable income. During the boom years of the mid-2000s, the combination of declining saving rates and rapidly rising household debt allowed consumer spending to grow much faster than disposable income, providing a significant boost to the economy. Recently however, the rebound in the saving rate has coincided with a reduction in household debt—a deleveraging—that has acted as a drag on consumer spending and the economy.
In this Economic Letter, we show that movements in the availability of credit are very important for explaining movements in the saving rate. Over the past half century, greater credit availability for households has been associated with lower saving rates and a resulting higher leverage. Standard economic models seek to explain movements in the saving rate primarily in terms of movements in household net worth, as measured by the value of assets minus debt. Taking credit availability into account significantly improves the explanatory power of saving rate models.
To be precise, their model shows credit to HH can explain 90% of variance in savings rate.
They also point to an interesting data – the ratio of household debt to disposable income has dropped from 130% to 118%. It takes me to this superb speech by BoJ official. He says in US, HH increased their leverage levels (compared to Japan whose corporates leveraged) and because of demographics, deleveraging is going to be painfully slow.
I am wondering is this decline from 130% to 118% slow? I would guess it is not as slow. May be further lowering of leverage is tougher going ahead. Interesting research agenda.