Savings Rate Usually Rises In Recession, And Fortune Has It Wrong

Geoff Colvin’s column in Fortune ignores many decades of data in arguing that savings usually falls during recessions, providing an automatic stabilizer.  He cites statistics from the Great Depression and anecdotal reports from the time of Joseph and the Pharoah.  He argues that our problem is that consumers did not build up savings balances ahead of this recession, so they are doing something unusual: increasing savings in a recession.  This scares Colvin, who says that we-the country-have our savings pattern backwards.

Let’s look at the data.  Here’s all the monthly history we have, with recessions shaded in pink:

I don’t see the savings rate falling in recessions, at least not by eyeball, so I did some calculations.  I computed the average savings rate over the 24 months preceding each past recession, during the recession, and over the 24 months following the recession.  Here are the results:

Looks to me like the savings rate most often rises in recession.  Not always, but on average.  Why is that?  As I’ve noted in a previous blog post and a video, consumers today are cutting back disproportionately to their loss of income, due to fear.  That may well have happened also in 1970, 1973-75, 1980, 1981-82. If anything, it looks like we are reverting to the most common pattern rather than breaking new ground.

How did Fortune let an error so easily checked slip into print?  The issue is thin and nearly devoid of advertising.  Perhaps the fact-checkers have been let go.

Subscribe by RSS Subscribe by Email