Quarter 3, 1998
by Lynn E. Browne

The U.S. personal saving rate has averaged less than 1 percent thus far in 1998. Recent changes in the way the Bureau of Economic Analysis calculates income reduced the saving rate from a little under 4 percent. However, the change highlights just how little people save and how much the saving rate has fallen. In the early 1990s, the saving rate was over 5 percent; and in the early 1980s, it was as high as 9 percent.

Should our low saving rate be a source of concern? Should we not emulate the thrifty ants of Aesop's fable, rather than the profligate grasshopper?

People save for a variety of reasons: to make major purchases like a car or a home, to protect themselves from job loss or unexpected medical expenses, and to support themselves in retirement. But saving is not the only way that individuals can build their wealth. Over the past ten years, rising stock prices have greatly increased the value of households' equity holdings. As a consequence, households' financial net worth at the end of 1997 was higher, both absolutely and relative to income, than it had been in more than twenty years — despite our low saving rate. Indeed, some economists believe that the long bull market explains our low saving rate. Capital gains are allowing us to build that nest egg, buy that house or car, and feel more secure against emergencies, without requiring us to sacrifice current consumption.

For the economy, however, saving still matters. Saving funds investment, which fuels future growth. And for this, the bull market provides small comfort. Rising stock prices may mean that existing assets have become more valuable, but they do not mean that we have created new plant and equipment. So perhaps we should be concerned that we save and invest too little.

But personal saving is not the only fuel for investment — businesses and governments also save. And in the 1990s, increases in business and government saving have offset the decline in personal saving. Business investment in equipment and structures is actually a larger fraction of GDP now than in the early 1990s, 11 percent compared to 9 percent, and slightly exceeds the norm for the past 30 years. In addition, a growing share of business investment is in computers, where prices have been declining very, very rapidly. Thus, the 11 percent of GDP that is devoted to business investment today buys more productive capability than 11 percent would have bought in the past.

Meanwhile, the U.S. economy has been shifting away from industries that use lots of physical capital. Capital-intensive industries, such as agriculture, mining, and public utilities, have been shrinking or growing only slowly, whereas services, which uses much less capital per worker, has been gaining in importance. Industry by industry, capital-labor ratios have been rising. But, economywide, the shift toward services has tended to dampen our investment requirements, even as falling computer prices have increased the value of our investment dollars.

Thus, through much of the 1990s, we have been able to consume like profligate grasshoppers while still investing like thrifty ants.

Lynn Browne is the Director of Research at the Federal Reserve Bank of Boston.