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GDP growth and Average Personal Savings Rate Inversely Related

Chris Surran and Evans Alison

 

Analyzing GDP growth year over year and Average Personal Savings Rate data yields interesting results. In general, GDP and personal savings rate seem to have an inverse relationship. However, GDP seems to take a quarter or two to react to this increase or decrease in personal savings. This relationship is very intuitive. As consumers start to save more money they begin to consume less. Since consumption is a major part of GDP, it makes sense that GDP growth would weaken in a period of increased savings. Conversely, in a period of decreased savings general consumption will increase, which in turn will lead to an increase in total GDP.

 

Since Q1 2016, the Personal Savings Rate has decreased from 5.7% to 2.6%. In the same period, GDP’s year over year growth has grown from 2.52% to 4.12%. This data seems to comply with the inverse relationship discussed above. Furthermore, similar trends can be found throughout the data set.

 

This relationship yields an interesting relationship. What is the optimal personal savings rate?

18 thoughts on “GDP growth and Average Personal Savings Rate Inversely Related

  1. Katie Paton

    The permanent income hypothesis says there is a weak relationship between current income and savings. This means that If one expects future income to rise, then they will save less now. Personal saving and spending depends greatly on expectations. It is baffling to think that ones expectations for the future play such a large role in effecting real GDP.

  2. clintong20

    This inverse relationship of savings and the GDP is amazing. I enjoy the inherent sense it makes as it stands as very logical. Increased consumption = Decreased savings. Increased savings = Decreased savings. Is it possible to equalize this relationship?

  3. trammellc20

    This inverse relationship is very interesting, especially since it seems logical to save more. There seems to be a gap between what is good for the individual, or saving, and what is good for the economy as a whole, or higher GDP.

  4. radcliffec20

    I never thought about the relationship between GDP and personal savings like this before. I wonder how increased savings would affect GDP in the long-run; could the increased savings now lead to increased spendings later? Would this future spending from increased savings be greater than future spending without them?

  5. warej20

    Given the factors within GDP, this relationship and reasoning makes sense. As a person I have always valued the caution behind saving, but I now realize that such saving may have negative impacts on our economy. From the data it seems that there is a desirable level of spending as I must spend to contribute to consumer spending and overall GDP. I now realize the effect that I can have and more importantly the cumulative effect we have as a population have with our saving and spending.

  6. bearupk20

    The relationship between GDP and Average Personal Savings makes sense, as does the part about GDP having a delayed effect when savings increase or decrease. Its interesting that saving is usually encouraged, but this post shows that sometimes saving too much can have a negative impact on our economy, which is a relationship that is not instantly obvious to the average consumer.

  7. Lauren Fredericks

    This relationship does make a lot of intuitive sense, and I'm surprised to see such clear examples within this data. It reminds me a lot of the (very very many) videos we watched in high school on the Great Recession, and recessions/depressions in general. While saving can be a very good thing, when it begins to deprive the economy it hurts almost everyone.

  8. johnsonjm20

    This data is very interesting as it illustrates how the economy is a machine and every little cog matters. It is interesting because in people's mind, saving is good, but in terms of the health of the economy, it can have a negative effect. This data shows we must find a healthy balance between saving for personal safety and spending to help the economy.

  9. wickhamj20

    This is a very interesting post but it makes complete sense. By saving money and taking it out of circulation of the economy, producers will suffer greatly since the population has collectively decided to slow domestic consumption which is a major factor of GDP. I find it very interesting in the massive decline of savings between December of 2012 and February 2013, why do you think that could be?

  10. longa20

    I did not know that GDP and personal savings rate had an inverse effect. However, it does make sense as purchasing is the opposite of saving and so this should take place. As for what the optimal savings rate should be, I feel like that depends on the state of the economy.

  11. bullr20

    I would think that an increase in GDP would lead to an increase in personal income, and thus an increase in personal savings as well. Indeed, savings is often framed as being dependent upon the general health of the economy -- so this inverse relationship is very surprising to me. Then again, it does seem intuitive that the more individuals save, the less powerful the multiplying effect of an increase in GDP.

  12. spencerc20

    It does make sense that increased consumption would lead to decreased savings and vice versa. It also is really interesting to look at the correlation in the data and see how different economic upturns and downturns affect the relationship between these two.

  13. the prof

    How could we test this more carefully? Nominal or real data? Growth rates versus levels of variables? There are also data issues, savings rates are often a residual – the difference between income and consumption for example – and are a smallish number. So modest errors in the "big" numbers of Y and C lead to large errors in S. We also need to look at corporate savings, and not just household savings.

  14. moraifa19

    This is slightly intuitive, however I wonder if there is an equal bounce back. All this saved money is not being spent on consumption just yet because they plan on spending it in the future. So overall, the saving and consumption level out, however, what causes someone to save vs. consume in a given time period?

  15. myerse20

    While you say the relationship is intuitive, I honestly would have expected the opposite. While GDP does measure consumption, one of its components is investment. So I would have thought that investment would have mirrored GDP's growth. It was also fascinating to me that there is a lag time, but it definitely makes sense. Great work!

  16. laytonr20

    I feel like we need to be careful here, since GDP has generally tended to increase, so simply looking at the personal savings rate where it decreased would seem to imply an inverse correlation, but during a time when the rate is increasing, there will appear to be a direct relationship. For example, 2006-2013 is an example of this.

  17. hallk20

    Perhaps people saw a stronger economy post the great recession, so they decided to use the higher purchasing power of their dollar to buy the things they likely weren't able to before. I could be mistaken on this, but I thought that people spending more money meant that the economy was in a good place? Should we be concerned people are spending rather than saving?

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