The economic impact of increased US savings
Charles Atkins and Susan Lund
McKinsey Quarterly, March 2009
US consumers are spending less and saving more. The economic impact of that
combination will depend upon how fast incomes grow.
New research from the McKinsey Global Institute shows that the economic
impact of further US consumer deleveraging will depend on income growth.
Without it, each percentage point increase in the savings rate would reduce
spending by more than $100 billion - a serious drag on any recovery.
Relatively healthy income growth, on the other hand, would help households
reduce their debt burden without trimming consumption as much.
The significance of any fall in consumption could be profound. US consumers
have accounted for more than three - quarters of US GDP growth since 2000
and for more than one - third of global growth in private consumption since
1990. These trends were fueled by a surge in household debt, particularly
after 2000 (Exhibit 1), and a decline in the personal savings rate - to a
low of - 0.7 percent, in 2005. From 2000 to 2007, US household debt grew
as much, relative to income, as it had during the previous 25 years.
Appreciating household assets - the "wealth effect" - enabled consumers to
spend and borrow more even as they saved less. The value of US household
assets rose by some $27 trillion from 2000 through 2007. Rising home values,
as well as stocks and other financial assets, accounted for more than two -
thirds of this gain.
This dynamic sputtered to a halt when the housing bubble burst and the
financial and economic crisis ensued. Falling values for homes, stocks, and
other assets have battered US households: from mid - 2007 through the end of
2008, their net worth fell by roughly $13 trillion. These recent losses
erased all the gains in net worth, relative to disposable income, since the
early 1990s (Exhibit 2). It's not surprising that US consumer spending fell
at a 4.3 percent annual rate in the fourth quarter of 2008 - a major reason
for the broader economic contraction.
The flip side of falling consumption is a rising personal savings rate,
which reached 3.2 percent in the fourth quarter of 2008. Net new borrowing
by households also has fallen sharply from its 2006 peak. In the fourth
quarter of 2008, it turned negative for the first time since World War II
(Exhibit 3).
Several forces underlie these shifts. Some households are responding to
worries about possible unemployment or underwater mortgages by paying down
debt or avoiding new debt. Others have found their credit lines shut down or
can't get new credit, because banks have tightened their lending standards.
How far these trends will go is a critical economic uncertainty in the
months ahead. The economic impact of today's deleveraging will depend on how
it unfolds - through income growth, higher savings, or some combination of
the two.
If incomes stagnated, for example, households could deleverage only by
saving more. Every percentage point reduction in the debt - to - income
ratio would require nearly a one percentage point increase in the savings
rate. The US personal savings rate reached 5 percent in January, 2009. If
this level prevailed and incomes didn't grow, this would reduce the
household debt - to - income ratio by five percentage points - which still
wouldn't be enough to restore the levels of indebtedness prevailing in 2000,
before borrowing started to accelerate.
But if incomes rose, households could both reduce their debt burden
significantly over time and continue to consume. If US incomes grew by 2
percent a year, for instance, households could reduce their debt - to -
income ratio by as much as they would in the scenario above - but with a
personal savings rate of only 2.3 percent.
These different scenarios have serious implications for the US and global
economies because, holding incomes constant, each percentage point increase
in the savings rate translates into roughly $100 billion less in consumer
spending. A 5 percent savings rate would mean $530 billion less in spending
each year if US incomes fail to rise; if they rose by 2 percent a year, a
2.3 percent savings rate would mean $250 billion less spending, all else
being equal.
In short, the importance of income growth is difficult to overstate. With
it, households can simultaneously reduce their debt burden, rebuild savings,
and boost consumption. But without significant income gains, deleveraging
could undermine consumption and the global economy for years to come. One
implication: policy choices that favor productivity and employment growth -
critical determinants of income growth - will make deleveraging less
painful. Efficiency breakthroughs in sectors, such as health care and
government, that employ large numbers of people - but that have not enjoyed
productivity revolutions similar to those experienced in industries like
retailing and wholesaling - would make a dramatic difference.
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Received on Mon Mar 30 14:15:08 2009
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