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1 1 (November 30, 2020)

handle is hein.crs/govdcro0001 and id is 1 raw text is: '* i$\ Updated November 30, 2020 Introduction to U.S. Economy: Personal Saving Personal saving, which includes the saving of households but not of businesses or government, can have a significant impact at both the individual and economy-wide levels in the long and short terms. Recent trends in personal saving, specifically during the Coronavirus Disease 2019 (COVID- 19) pandemic, have shown notable increases in the personal saving rate. The saving rate, which is the ratio of total personal saving to disposable income, presents a tradeoff between current and future consumption. A relatively low saving rate implies higher current consumption but lower future consumption. Greater present consumption boosts individuals' living standards now; however, it leaves little to be invested in capital projects that will boost future living standards. Conversely, a relatively high saving rate implies lower current consumption but higher future consumption. This tradeoff has implications for both short-term and long- term economic growth. In the short term, a rising personal saving rate can temporarily slow economic activity, assuming no other changes to income. If on average individuals begin saving a larger portion of their paychecks, it means less money is being spent on consumer goods and services in the economy. Because consumer spending makes up about 70% of the U.S. economy, even a small decrease in consumer spending can reduce aggregate demand and economic activity. Alternatively, a falling saving rate may result in temporarily faster economic growth as individuals spend a larger portion of their pay on goods and services. Whether changes in the saving rate are helpful or harmful in the short run depend on the state of the economy. A rise in the saving rate during an economic downturn can be problematic. In response to a recession, individuals may rationally respond to increased uncertainty about their future income by increasing their saving rate to provide a buffer against reduced income (caused by job loss, for example) in the near future. As a result, however, the economic downturn is further exacerbated due to the additional decrease in consumer spending resulting from the rising saving rate. By contrast, in the midst of a healthy and expanding economy, a rising saving rate may result in a more sustainable level of consumer spending, thus preventing the economy from overheating. An overheating economy occurs when demand for goods and services exceeds the economy's ability to produce those goods and services, which can result in accelerating inflation followed by a recession. In the long term, a higher saving rate will generally lead to higher levels of economic output, up to a point. When individuals save a portion of their income, those savings are generally loaned to businesses to finance new investments. For example, an individual's 401(k) is a saving vehicle for their future consumption after retirement, but before retirement, those funds are generally invested in various companies through the purchase of stocks and bonds. The overall level of investment is one of the main determinants of long-term economic growth. Business investments in physical capital (i.e., machinery, buildings, and factories) allow the economy to produce more goods and services with the same amount of labor or raw materials, increasing the productive capacity of the economy. As personal saving contributes to investment, all else equal, a higher saving rate will result in a higher level of physical capital over time, allowing the economy to produce more goods and services. For further information on business investment, refer to CRS In Focus IF 11020, Introduction to the U.S. Economy: Business Investment. H ow Is Pers ona Saving Measured` The Bureau of Economic Analysis (BEA) measures the U.S. personal saving rate (see Figure 1) as the difference between aggregate income and consumption spending, which likely introduces some measurement error. The saving rate may understate the level of saving in the economy because certain spending is considered consumption, even though such spending is conventionally thought of as investment, such as spending on durable consumer goods (e.g., automobiles, appliances). Additionally, BEA does not include changes in asset prices or capital gains as income under the saving rate measure. Figure I. Personal Saving Rate, 1959-2020 35%6 14%6 \t N 0% 195 1969 1979 1989 1999 2009 2019 Source: Bureau of Economic Analysis. Notes: Ratio of total personal saving to total disposable income in the United States. Gray bars represent recessions.

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