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handle is hein.crs/govybt0001 and id is 1 raw text is: frmi ig thleiltvdbaesne14 Updated January 22, 2019 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. Economic Considerations The saving rate, which is the ratio of total personal savings 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 supplies individuals 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. Short-Term Economic Impacts In the short term, a rising personal saving rate can be a temporary impediment to 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. 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 protect them from potential job loss or reduced income 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 is often characterized by accelerating inflation followed by a recession. Long-Term Economic Impacts In the long term, however, 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 saved funds are generally loaned out 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 such, 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 IF1 1020, Introduction to the U.S. Economy: Business Investment. How is Personal Saving Measured? Economists generally track economy-wide saving via the personal saving rate (see Figure 1). Figure I. Personal Saving Rate 20% 15% 10% 5% 1959 1970 1982 1994 2006 2018 Source: Bureau of Economic Analysis Notes: Ratio of total personal saving to total disposable income in the United States. Grey bars represent recessions. Since the early 1970s, the U.S. personal saving rate has fallen from above 12% to a low of 1.9% in 2005. Following the beginning of the 2007-2009 recession, the saving rate briefly increased before beginning to fall again. Over the past year, the saving rate has averaged about 6.7%, suggesting that for every $100 of disposable income individuals are spending about $93.30 and only saving about $6.70. The personal saving rate produced by the Bureau of Economic Analysis (BEA) is measured as the difference between aggregate income and consumption spending, https:/crsreports.congre-- -

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