Not knowing how long it will be before they can reclaim a sense of ‘normalcy’ in this downturn could mean some people meet their savings goals more quickly.
Photo: David Paul Morris/Bloomberg NewsThe coronavirus pandemic shut down the economy and forced millions of people to apply for unemployment. At the same time, local stay-at-home orders and a work-from-home world mean some people have extra money to put away—for now.
As of April 2020, the U.S. personal savings rate hit an all-time high of 33%, up from 12.7% in March, according to the U.S. Bureau of Economic Analysis. The previous record was 17.3% in May 1975, the tail end of an early 1970s recession following a two-year period of economic stagnation.
Relief programs have temporarily raised income with unemployment insurance and one-time government stimulus checks.
“This enormous 33% savings rate we saw in the April data is not part of a long-run change in the attitudes of American households,” said David Laibson, professor of economics at Harvard University. “It’s a very specific response to events that are transitory. So you have a very special set of circumstances that lie behind this.”
The national savings rate is a number averaged from reported percentages of an individual or household income, including the money that doesn’t go to personal expenditures or taxes. It doesn’t capture what people have already saved or how much individuals are saving.
A lot of household expenses are simply on pause for now: The record-high personal savings doesn’t reflect changes in overall wealth. It doesn’t capture the number of people who have been able to defer rent and mortgage payments, as well as payments owed on debt or credit cards. People may then have flexibility to put more money into savings, but those payments will have to be made eventually, at which point the savings rate will likely drop.
It also doesn’t consider the value of investments. “The stock market has declined quite a bit,” said Brigitte Madrian, dean of the business school at Brigham Young University. “The personal savings rate would say I’ve saved 25% of my income this month, but in fact, the amount of money I have ‘saved’ is less than it was last month, because of the decline in the market and changes in the value of my assets like my 401(k) or my house.”
Importantly, the number also doesn’t reflect the forces pushing individuals to save more.
“The personal savings rate as calculated by the statisticians in the government doesn’t necessarily correspond to how individuals think about savings,” said Prof. Madrian.
Fears around an economic downturn will drive savings up temporarily. Because so many Americans don’t know how long it will be before they can reclaim a sense of “normalcy,” the uncertainty of this economic downturn could mean some people meet their savings goals more quickly—or overshoot them entirely.
“They’re worried about what’s coming later this summer, when they may not be able to get the job they used to have or to find a new job because business is generally hurting, deeply hurting,” Prof. Laibson said. “So I think there’s a bit of justified terror in those households, sitting around the dining room table and wondering how they’ll make ends meet when the stimulus check is spent and unemployment ends. But part of that terror will drive more savings in April.”
For those who haven’t contracted Covid-19, they are concerned they won’t be able to afford the medical expenses. Those who have been able to keep their jobs, as others lose them, are putting money away in advance of potential layoffs or furloughs.
If Americans become big savers for months on end, it will further depress the economy.
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Alexandra Lashner and her husband found themselves saving more than ever during the pandemic. They had spent the better part of this year scraping and saving to replenish their emergency fund following two respective job changes and a big move—from Lancaster County to Philadelphia, closer to family.
“Ever since Covid started, we’ve had a lot more money just to put in the bank,” said Mrs. Lashner, a 26-year-old marketing professional living in Bensalem, Pa. “We’re not commuting to work, and we’re saving a lot more money every month because we’re not spending money on gas and tolls.”
Mrs. Lashner said she is also taking the money she would typically budget for eating out, entertainment and putting it toward her savings goals. Cutting expenses like her gym membership also freed up more money to sock away.
“Overall there’s just a lot of these extra expenses that we had in our monthly budget that aren’t being used,” she said. “Whatever is extra is just going into our savings account right now.”
Before the pandemic, Mrs. Lashner was already making changes to her budget. She’s hoping keeping those adjustments could help them continue this good savings behavior.
“For the past year, we weren’t buying a whole lot of things in the first place because money was tight,” she said. “We mostly made our meals at home, we brought our lunches in, we didn’t purchase things for a while.”
As reopening begins, the expenses many were able to cut during lockdown will be unavoidable.
“How much of this is being actively put into a savings account and how much of it is just extra money floating around your checking [account] and as soon as the world opens up you’ll go and spend it?” Prof. Madrian said.
The fear of a recession doesn’t last forever, Prof. Madrian said. And when the economy reopens again, people’s feelings will change—and with it, their spending.
“That type of cautious behavior around spending will start to diminish as soon as people feel more secure about the future of the economy, and I think people are feeling better than they did in the middle of March, but I don’t think we’re back to a baseline normal level of security,” she said.
“We’re likely to see personal savings rates stay high for a little bit, but it’s not going to stay at 33%, but it may very well be higher than historic averages until the economy gets closer to being back to normal.”
Write to Julia Carpenter at Julia.Carpenter@wsj.com
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