The Effect Of Recession On Net Private Sector Saving

It is not unnaturally believed by some that recessions should cause an increase in net private sector savings. This would be due to the notion that, when times are tough and unemployment is heightened, saving one's money is less risky than using it for consumption. However, despite the seemingly sound logic of this, the data suggests a more complicated relationship. Examine the following graphs of net private savings as observed between 1929 and 2011 (quarterly data is not available between 1929 and 1946, so annual data is provided instead):

Now observe the dates of all the recessions the U.S. has undergone since the Great Depression (taken from Wikipedia), as well as the observed change in net private savings during those dates, as measured by the graphs above:

Aug 1929–Mar 1933: Annual Net Decrease
May 1937–June 1938: Annual Net Decrease
Feb–Oct 1945: Annual Net Decrease
Nov 1948–Oct 1949: Quarterly Net Decrease
July 1953–May 1954: Quarterly Net Decrease
Aug 1957–April 1958: Quarterly Net Decrease
Apr 1960–Feb 1961: Quarterly Net Increase
Dec 1969–Nov 1970: Quarterly Net Increase
Nov 1973–Mar 1975: Quarterly Net Decrease
Jan–July 1980: Quarterly Net Increase
July 1981–Nov 1982: Quarterly Net Decrease
July 1990–Mar 1991: Quarterly Net Increase
March 2001–Nov 2001: Quarterly Net Decrease
Dec 2007–June 2009 : Quarterly Net Increase

It is obvious from this data that before 1960, every single recession the U.S. experienced resulted (supposedly) in a decrease of net private savings. This runs against the reasoning we presented at the beginning of the article, and it would be helpful to try to explain why that could be the case. I believe the explanation can be found in the difference between "saving money" and the definition of savings as employed by the above data. When times are rough, everyone does a little more to spend less. However, attempting to spend less does not correspond necessarily to increasing one's savings. It could be that a family that is trying to be more frugal isn't placing the money it has conserved into the bank out of fear of losing it (as happened to many during the Great Depression). Another arguably more likely scenario is that, since recessions are coupled with increasing unemployment, a decrease in average income could theoretically cause a corresponding decrease in average savings.


But assuming that the above theory is true, how then, can we explain the increase in savings that we see in many of the later recessions. One obvious conjecture for 4/5 of these cases is the following: the recessions of 1960, 1969, 1980, and 1990 all correspond to periods in which the Federal Reserve raised the interest rate in order to combat inflation. In other words, the recessions were purposefully orchestrated. Higher interest rates provided the incentive needed to encourage corporations and citizens to save more and spend less.


The elephant in the room remains the most recent recession. A net increase of net private savings was observed despite the fact that the interest rate was not raised (and was in fact lowered to basically zero). In order to get to the bottom of this, it would be helpful to take a closer look at this particular period in graph form:

In the graph above, net private saving = domestic business saving + household and institutional saving. As we can clearly see then, the very beginning of the recession is characterized by a large surge in net private saving, brought on by households and institutions. This is possibly due to the housing market crash that precipitated the recession. Many people who saw the price of their homes start to collapse may have thought it wise to start saving; the counter-active effect of lower savings due to lower income that we discussed earlier had not started to kick in yet, since unemployment did not begin to seriously rise until around the second quarter of 2008, as illustrated by the graph below (courtesy of the Bureau of Labor Statistics):
Curiously enough, this rise in unemployment is right around the time we start to see household and institutional saving start to dip. This causes net private saving to decrease as well. Something even more interesting happens a bit later though: household/institutional saving starts to increase once again. This could be due to the fact that unemployment had a short 2 month period of stagnation in quarter 3, which perhaps gave the false impression that the economy had stabilized. However, it is during this same time that the brunt of the recession seems to have hit the domestic business sector, where we see a large drop. This is enough to overcome the rise in household and institutional savings, causing the net private saving to drop further still. It appears as if that downward trend should've have continued on, but instead we see a sharp increase in domestic business saving beginning in the fourth quarter of the 2008 year. 

What could account for this? Though it is hardly indicative of causality, the Troubled Asset Relief Program initiated under George W. Bush to alleviate the crisis was passed during this very time. This substantial increase in domestic business saving was enough to pull up net private saving. In the first quarter of 2009, we see a continuing increase in domestic business saving, as well as a slight bump in household/institutional saving. Potential reasons for this? The government passed the American Recovery and Reinvestment Act of 2009 during this period, better known as the Stimulus. Despite rapidly rising unemployment, this could have led to the temporary increase we see in household/institutional saving (if we extend the graph a bit more to the right, we will see that household/institutional saving plummets severely in the following quarters, most likely due to the unemployment rate reaching its trough and overwhelming any of the aforementioned transient effects of the Stimulus on public perception.)

I feel the need to emphasize that none of the above is meant to imply any causality. I have only presented theories and rationalizations based on the data observed that I believe to be of sufficient probability as to warrant notice.