Question

The U.S. economy was slow to recover from the global financial crisis of 2008-2009. Additionally, the US personal savings rate has trended overall downward. Before the 1980s it had mostly been in double digits, but by the end of last year it was at 7.6%. What impact does the personal savings rate have on the overall speed of the ups and downs of economic cycles?

Answer 1

Personal saving rate is a valuable indicator regarding the economy and its presence in different stages of cycle taking place. A higher saving rate, means higher supply of loanable funds and interest rate decreases. It is encouraging for the investments, and it will prolong the expansion stage of the economy. A higher saving rate, is also an indicator of increased level of income. So, it will also reduce the period of recession stage of the economy. So, economy can recover well from the recession and prolong the expansion period.

Though, a decreasing personal saving rate, become problematic for the economy and it is a sign that income level is decreasing and people have decreasing level of purchasing power. It will make economy to move towards the recession or slowdown, where funds will be less available in the loanable fund market. So, decreasing level of personal savings rate, will prolong the recessionary period.