Is Saving More Bad for the Economy?

Martin Crutsinger — AP Economics Writer

WASHINGTON (AP) — The personal savings rate, which was hovering near zero just a year ago, is now at the highest level in more than a decade as a severe recession causes Americans to tighten their belts.

What does this rate say about the recession? And can the economy recover if consumers save more and spend less?

The Commerce Department reported Friday that the personal savings rate stood at 4.2 percent in February, down just a bit from the January level of 4.4 percent. That marked the first time in more than a decade that the savings rate has been above 4 percent for two consecutive months.

Even more remarkable: The rate is up from readings at or near zero just a year ago.

Here are some questions and answers explaining the savings rate and exploring how it has changed in recent years.

Q: What is the personal savings rate?

A: The savings rate is the percentage of consumers' total after-tax income that is left after subtracting the nation's consumer spending. It is reported by the government on a monthly basis.

Q: Is that the same as net worth?

A: No. The net worth is a calculation of a person's assets — bank deposits, stock values, home values — minus his liabilities — home mortgages and other debt.

Q: Are the two related in any way?

A: The amount that people don't spend in any given month can add to their total savings over time, but the savings rate just measures the difference between what people earn and what they spend. The government sees what is left over as the rate that people are saving.

Q: How has the rate changed over time?

A: For four decades from 1950 until 1990, the rate averaged around 9 percent. But then, starting in the 1990s, it started dropping sharply, and it's averaged a minuscule 1.8 percent so far this decade. In 2005, 2006 and 2007, the rate slipped below 1 percent to levels not seen since the Great Depression.

Q: What happened to push the savings rate so low?

A: A big factor was the stock market boom in the 1990s and the housing boom in the early part of this decade. People did not feel they needed to save as much because the value of their stock investments and their homes were soaring. In fact, the surge in home values prompted many people to use their homes as piggy banks; they took out home equity loans against the rising value of their houses to finance spending sprees.

Q: What happened to turn that situation around?

A: The bursting of the technology stock market bubble in 2000 and the bursting of the housing bubble beginning in 2006 caused people to lose trillions of dollars in net worth. Many people realized they needed to start saving more. That trend was accelerated after the recession began in December 2007 and job losses started mounting — people decided they needed bigger nest eggs in case they got laid off.