Sep 22, 2019

Americans are saving at an unusually high level after Trump's tax cuts

People shopping.

People shopping. Photo: Spencer Platt/Getty Images

Americans have been socking away an unusually high rate of their income since the Great Recession, which economists warn could become harmful to the economy over an extended period of time, according to the Wall Street Journal.

Why it matters: Economists think that if the saving rate surpasses investments for several years, it could hinder economic growth and make it difficult for the Federal Reserve to cut interest rates to boost growth during the next downturn.

Details: The personal-saving rate — or the percentage of income that people save after taxes — rose from 3.7% in 2007 to 6.5% in 2010, after the end of the Great Recession. This is standard and is usually followed by a decline as people grow more optimistic about the economy during an expansion and spend more.

  • However, the personal-saving rate continued to rise to an average of 8.2% in the first 7 months of 2019 — despite U.S. consumers experiencing historic levels of confidence in the economy.
  • In total, savings outpaced spending and investing in 2018.

What they're saying: "That is evidence to suggest that something structural has changed, and it’s made the saving rate kind of sticky at higher levels,” Tiffany Wilding, a U.S. economist at Pacific Investment Management Co., told the WSJ.

How it works: Some economists believe that today's high saving rate was influenced by the 2017 tax cuts passed by President Trump. Economists can't tell who's saving, as the latest saving data is not broken down by income, but they assume that the recent saving rate rise is likely being driven by the wealthy.

  • The tax cuts boosted many wealthy Americans' after-tax income, but possibly not enough to change their spending habits. As a result, they started saving more.
  • Others think the higher rate is the result of Americans who lived through the Great Recession — and were scarred by it — preparing for the next market crash. Another possible explanation is baby boomers preparing for retirement.

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