Economics taught us that the business cycle follows the performance of an economy from recessions to expansions and the other way around. Studies reveal what businesses and population usually do in such cases – how an investment is made, how inflation affects prices, how the decision to take long-term investments is made, etc.
Investors using macroeconomics try to identify where the economy is in terms of the business cycle and what is the data that may point to the next phase of the cycle.
For this, they study upcoming economic events and pay special attention to leading and coincident indicators rather than lagging ones.
The savings rate is not a leading economic indicator. Instead, it acts as a confirmation of where the economy on the business cycle is – the higher the savings rate, the more the certainty that recession is still present.
The annual change in bank deposits in the United States grew to over $2 billion in 2020 so far, the highest in over four decades. In fact, it dwarfs any data from 1974 to the present.
Bigger Recession That Anticipated
Such a high savings rate poses extreme challenges to economic performance. Besides the fact that it shows the size of the economic recession (i.e., just compare the current savings rate with the one during the 2008-2009 Great Financial Crisis), it shows a frightening certainty – consumers forgo current consumption in favor of future one.
In economic terms, it represents the size of the personal income that consumers prefer to save rather than spend in the present. Why would anyone increase savings?
Uncertainty is the main answer. Uncertainty about job stability, the ability to find a new job should the current one is lost, or the length of the economic recession. What if the economy enters a depression?
It is not only an American thing. One of the main differences between the current economic recession and the previous ones is that this time all economies in the world are in a recession. For example, the Great Financial Crisis of 2008-2009 affected the United States and Europe more than it affected, say, Australia or Singapore. Hence, investors could have simply moved funds around the world, chasing economies better positioned on the business cycle.
Not this time. Data from the Euro area also shows the housing savings rate at the highest level for at least two decades.
The road to economic recovery is full of uncertainty. Judging by the level of the current savings rate, we may rather see a depression before the first sign of economic recovery.