In a commentary in Morgan Stanley's Global Economic Forum, Richard Berner suggests -- among other things -- that the US personal saving rate may be about to rise.
[T]he saving rate may rise back to perhaps 4–6% by the end of the decade. Indeed, I think the rate may rise close to 3% by the end of 2006. The analytical framework behind this prediction is, of course, the so-called "life-cycle" model of consumption and saving, in which consumer spending is a function of both income and wealth... [E]stimates of the model consistently produce propensities to spend out of income that are 13–15 times larger than those from wealth, including housing wealth. Together with the lags in response to a change in wealth, these relationships imply a slow adjustment of the saving rate, consistent with the slow adjustment of consumers as they defend their lifestyles in the face of uncertainty.
... The steady, 600-basis-point decline in interest and dividend income as a share of disposable income since their peak in 1989 has reduced the saving rate because such income tends to be saved rather than spent. And the steady rise in the share of government transfers like Medicare has reduced the saving rate because such "income" is 100% spent rather than saved. Thus, Joel Prakken of Macroeconomic Advisers, LLC shows that these compositional effects have reduced the saving rate by about 200 bp since the mid-1980s, while the rise in wealth/income has reduced it by about 400 bp.
However, Berner also adds that this rise in thrift is unlikely to stop interest rates from rising this year. In fact, he thinks that "a faster rise in thrift would require a catalyst -- which, in my view, happens to be nothing less than a significant rise in interest rates".
Obviously, the decline in the US personal savings rate cannot continue indefinitely, and would probably, at some point in time, reverse. Where the world then finds compensating demand will be crucial for the continued expansion of the global economy.
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