US households are saving more and spending less of their total income, in reaction to the global crisis, according to a new IMF study. The authors say the change has implications for global economic development.

The rate of US household consumption (as a percent of disposable income) is expected to decline further from its current level, thereby raising the saving rate to about 6 percent of disposable personal income, from nearly 5 percent in 2009.

On Monday, the US Bureau of Economic Analysis reported that the US savings rate was 4.8% in December; last week, Eurostat reported that the Eurozone savings rate was 15.8% in Q3 2009  and the rate has fallen to 2% in Japan in recent times.

The US rate was 8.4% in 1952; 9.4% in 1970; about an average of 10% in 70's and 80's and 1.8% at the end of 2008. In 1960-1990, the savings rate averaged 16% in Japan and had fallen to 4% in 2000.

US personal income increased 0.4% in December; Savings rate rose to 4.8%

Eurozone savings rate falls to 15.8% in Q3 2009 compared with 4.5% in US and 2.0% in Japan

By using various econometric and simulation approaches that capture well the major shocks during this crisis, IMF economists generated estimates of US consumption over the next several years.

According to their simulations, US household consumption and saving rates are expected to settle at 89½–91½ and 5–7 percent of disposable income, respectively, over the next several years. Similar levels of consumption and saving rates were last seen in the early 1990s

Although not too far from the 2009 savings rate of nearly 5 percent, this forecast implies a decline in US private sector demand of about 3 percentage points of GDP compared with the pre-crisis (2003–07) average, although much of this decline has now already occurred.

If US private sector demand remains at a subdued level, global economic growth will be less vigorous than before and the distribution of current account balances will need to realign—in other words, a smaller deficit in the United States will be matched by smaller surpluses or larger deficits in other countries.

Negative shocks

The decline in US consumption has coincided with a sharp decline in wealth and several closely related economic shocks:

Household wealth fell sharply, reaching 480 percent of disposable income in 2009. This decline was somewhat larger than the decline in wealth during 2001–02 after the bursting of the internet bubble. In contrast to earlier episodes of wealth decline, housing wealth also declined since peaking in 2007, as US house prices fell for the first time since the mid-1970s.

Economic and financial uncertainty surged in late 2008, as an extreme fear took over the financial market in such intensity and scope that have rarely been experienced since the Great Depression. The spread between corporate bonds and government securities of 10-year maturity rose to the highest level since the post-war period by a wide margin.

Long-term growth prospects of the US economy were appreciably revised down with the crisis. According to the IMF’s latest World Economic Outlook, US potential growth was estimated to have been above 3 percent in the late 1990s, but is now estimated to reach about 2 percent over the medium-term, that is after the US economy recovers from the crisis.

Credit availability tightened relative to pre-crisis years. The debt-to-income ratio of US households stopped growing in 2008, following a rapid rise before the crisis. The pre-crisis credit expansion was driven by mortgages, which accounted for nearly 90 percent of the rise in household debt over the 2000–07 period.

According to the authors, these negative shocks are expected to have lasting effects on US consumption beyond the crisis.