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September 7, 1973 While the economy floundered in the doldrums several years ago, economists tried to reassure their readers that consumers sooner or later would give the economy a much-needed boost by spending more and saving less of their after tax income. In the words of one such observer (Gardner Ackley), "Departures of the saving rate in one direction from the average are ultimately redressed by a regression toward the mean". These predic tions have now come true with a vengeance, since the saving rate has dropped all the way from 8.1 per cent in the 1970-71 period to only 5.9 percent in the first half of 1973. There may be disagreements about the level of the "average" saving rate, but the rates recorded around the turn of the decade obviously were quite high— in fact, the highest of the past quarter-century. In contrast, the recent 5.9-percent rate fell about midway between the relatively low average rate of the 1960-64-period and the relatively high rate of the 1965-69 period. The buy-now, pay-later atmosphere of early 1973 helped pull down the rate. So too did a crucial long-run factor—the growing importance in the population of large numbers of young families who normally are heavy spenders and poor savers. On the other hand, some factors worked to make at least some con sumers save more— in particular, the recent fall in the level of con sumer confidence, as well as the sharp increase this spring in inDigitiz<e9 f3 pFRAfeeRu n d s http://fjaser.stlouisfed.org/ Federal Reserve Bank of St. Louis Take with caution All estimates of personal saving, it must be added, should be treated with considerable caution. For ex ample, the initially reported rate of 6.7 percent for the first quarter of this year has now been revised sharply downward to 5.9 percent, and some weighty discussions pub lished this spring of why consumers were saving so much now appear somewhat irrelevant. The problem lies with the nature of the esti mating process. The Commerce Department calcu lates personal saving as a residual between disposable (after-tax) in come and consumer outlays for goods and services. (Incidentally, the saving figure includes not only personal saving, but also the saving of noncorporate businesses, both farm and nonfarm.) Being a resid ual, the saving series is dependent on the accuracy of the estimates of the two underlying determinants. Since these series are constantly being revised, significant differ ences can develop between the initial saving estimate that Com merce makes just after the end of any given time period and the later estimate based on more complete and up-to-date information. Buying for life The present relatively low level of saving, as indicated by the latest revised figures, may be related to certain demographic changes which are best explained by the life-cycle theory. According to this view, households in their formative years keep up their consumption stan(continued on page 2) Resoaircfei O qpajrtaaim it Opinions expressed in this newsletter do not necessarily reflect the views of the management of the Federal Reserve Bank of San Francisco, nor of the Board of Governors of the Federal Reserve System. dards and maintain relatively low levels of saving. In other words, they devote a large share of their income to assets high in consump tion services, such as housing and durable goods, and devote a corre spondingly smaller share to assets high in saving services, such as time deposits, stocks and bonds. During middle-age, households take advan tage of their higher income to build up their stock of saving assets for retirement. During retirement, the final stage of the life cycle, house holds keep a large percentage of their wealth in liquid form to meet current expenditures not covered by their sharply reduced income, and they also dissave by selling or consuming (through asset deprecia tion) certain assets such as housing and durable goods. Consequently, the demographic shifts in recent years would con tribute to a lower saving rate, be cause the sharp increase in the number of young people in the working population would tend to boost consumption rather than saving. Moreover, the importance of this factor should increase sharply throughout the present decade. The number of individuals in the 25-34 age bracket should rise by 9.1 million in the 1970's— a 57percent gain, or three times the increase of the past decade. This has meant a boom in house hold formations; in 1972, there were 2.3 million marriages, as against only 1.5 million in 1960. Moreover, these young families have been spending heavily—for Digitized for F R A S E R everything except baby clothes. (The birth rate has dropped consist ently in recent decades, so that the number of babies born in 1972 reached the lowest level of the postwar period.) Also, the long term decline in the number of per sons per household has meant a duplication of purchases for housing and durable goods, espe cially in view of the large increase in the number of young single (or double) households. All of these factors have tended to induce higher consumption and thereby reduce saving. Caution and inflation In the immediate future, however, there may be a tendency toward a higher saving rate, especially in view of the “precipitous decline" in consumer confidence reported by the University of Michigan's spring consumer survey. Consumers indi cated in this survey their intention to reduce purchases of both new cars and housing, partly because of increased caution, and partly be cause of the reaction to recent “borrowing" of sales from future time-periods. One recent study suggests that about one-fourth of this year's purchases represented hedge buying against future price increases. The inflation factor is hard to mea sure, because some observers claim that inflation tends to make con sumers buy in advance of future price increases, whereas others claim that it tends to reduce their buying because of an anticipated reduction in real income. The ex planation may lie with the differ- ence between anticipated and un anticipated price inflation. such repayments statistically are defined as saving. Some studies suggest that in periods of uncertainty— including uncertainty about rising prices— consumers become more cautious about spending and try instead to increase their saving. According to this view, rising prices force con sumers to reassess their capability for servicing fixed commitments. In particular, when caught unaware by inflation, consumers tend to re spond by increasing their saving and sharply reducing most types of consumption spending. Overwithholding Finally, there may be less impact from the tax-overwithholding phe nomenon, which has heavily influ enced the saving-consumption pic ture during the 1972-73 period. This factor during 1972 caused dispos able income (and presumably saving) to be smaller than it other wise would have been— smaller than it would have been if tax payers had acted to tailor their withholding taxes to match their liabilities.(Partly for that reason, the saving rate dropped from 8.1 to 6.2 percent between 1971 and 1972.) In 1973, overwithholding apparently has been continued on current pay checks, but it has been offset (at least in the spring period) by a larger-than-otherwise final settle ment between the Treasury and taxpayers on their 1972 taxes. This year, however, the inflation apparently has been anticipated because of the wide publicity given, first, to the easing of price controls under the Phase III program, and secondly, to the price upsurge in the agricultural sector. In other words, consumers have hurried to buy in the anticipation that prices would only go up in the future. Accordingly, their saving has fallen off as they have increased their consumption to ever-higher levels, including a whopping 18-percent annual rate of gain in durable-goods spending in the first half of this year. This factor should be less important as time goes on, assuming that consumers actually are becoming more uncertain about the future course of the economy. In addition, an increase in saving would auto matically develop because of the speed-up in debt repayments re sulting from the past upsurge in ? '9lt!fM f?fiiW e ^ & e d it e x t e n s io n s , s in c e http://fraser.stlouisfea.org/ Federll Reserve Bank of St. Louis It had been expected that the saving rate would rise in spring 1973 as consumers received their Treasury refund checks. This factor undoubt edly was present, but was offset by several other factors. (For that mat ter, measuring this phenomenon is difficult because of problems in seasonally adjusting the underlying data.) Disposable income and saving were reduced by the sharp increase (over 20 percent annually) in the social-security tax bite—and by the tendency of consumers to use their tax refunds as downpay ments on big-ticket items, which in combination with heavy borrowing helped support the buying splurge. William Burke o c=3 uoj8umsE/W •Ljein •uoSaJO •epeA9N . oijEpi M EM EH • E jU J O J ! | E 3 . EU O ZU V •jj|i3 'o a sp u e jj u bs ZSL O N HV\M3d a iv d 3 D V lS O d s n n v w s s v id is a u (Dollar amounts in m illions) Loans adjusted and investments * Loans adjusted— total* Securities loans Com m ercial and industrial Real estate Consum er instalment U.S. Treasury securities O ther securities Deposits (less cash items)— total* Demand deposits adjusted U.S. Governm ent deposits Time deposits— total* Savings Other time I.P.C. State and political subdivisions (Large negotiable CD 's) Weekly Averages of Daily Figures Member Bank Reserve Position Excess reserves Borrowings Net free (+ ) / Net borrowed ( - ) Federal Funds— Seven Large Banks Interbank Federal funds transactions Net purchases (+ ) / Net sales ( - ) Transactions: U.S. securities dealers Net loans ( + )/ Net borrowings ( - ) E>|SE|V npjng© 8®^[ BANKING DATA—TWELFTH FEDERAL RESERVE DISTRICT Selected Assets and Liabilities Large Commercial Banks • Am ount Outstanding 8 / 22 / 73 74,241 57,489 1,130 20,383 17,039 8,556 5,026 11,726 71,917 20,918 461 49,400 17,566 23,081 5,975 12,097 Change from 8/15 / 73 1,320 - 1,175 1,158 + 26 + 72 + 29 127 18 51 - 498 4 + 508 33 + 507 + 56 + 386 - Change from year ago Dollar Percent + 9,892 + 10,104 923 + 3,698 + 2,905 + 1,335 912 + 700 + 9,338 + 1,365 1 + + 7,921 651 + 6,894 + 782 + 6,357 + + 15.37 21.32 44.96 21.16 20.55 18.49 15.36 6.35 14.92 6.78 0.22 19.10 3.57 42.59 15.06 110.75 - + + + - + + + + + - + + + W eek ended 8 / 22 / 73 W eek ended 8/15 / 73 Com parable year-ago period 11 126 - 115 50 226 -1 7 6 + 34 2 32 0 + 463 - 933 + 142 + 651 + 144 "Includes items not shown separately. Information on this and other publications can be obtained by calling or writing the Digitized for FRA ^ r i nistrative Services Department. Federal Reserve Bank of San Francisco, P.O. Box 7702, http://fraser.stlOLiSjiiiPra.ii cisco, California 94120. Phone (415) 397-1137. Federal Reserve Bank of St. Louis
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