As the economy continues to seek sustainable growth, or at least growth strong enough to produce significant employment growth, one explanation for the weak growth of 2010 is a persistent, elevated household savings rate.
Because of increased debt levels prior to the Great Recession and declines in asset values like stocks and housing during the recession, households have had to increase savings to compensate for lost net worth. According to Federal Reserve data, household net worth, as a ratio of disposable personal income, or NW / DPI fell from a high of 6.4 in the fourth quarter of 2006 to 4.4 in the first quarter of 2009.
As a consequence, the personal savings rate (calculated as aggregate disposable income less household outlays as share of disposable income) is significantly higher in 2010 (6.1% in the second quarter of 2010) than it was for most of the prior decade (3.2% average for the 2000s). And of course, a higher savings rate means reduced levels of consumer purchases, as well as reduced housing demand. The following chart graphs the savings rate and NW / DPI over the last 25 years.
How long will the savings rate remain elevated? Until households complete repair of their balance sheets. Such repair will increase the NW / DPI ratio, which at 4.8 remains below the 25-year average of 5.2.
If the NW / DPI ratio continues to grow at the rate witnessed since the first quarter of 2009 (and was approximately flat for the first quarter of 2010), then by the end of the first quarter of 2011, it will be back to historical levels. At that time, the savings rate may come back to historical levels, freeing households to increase consumption and leading to higher GDP growth.