Households - Economic aspects ; Consumer behavior

Charles S. Gascon

Riccardo DiCecio

English

Research Papers in Economics

Economic SYNOPSES
short essays and reports on the economic issues of the day
2009 ￿ Number 17
S
harp declines in home prices, followed by a financial
crisis and a steep recession, rattled U.S. households
in 2008. Economic misfortunes have caused many to
reassess their finances, triggering sharp reversals in borrow-
ing and spending habits. 
Since the late 1980s Americans have steadily saved a
smaller and smaller percentage of their paychecks. While
the personal saving rate averaged close to 9 percent between
1959 and 1990, it declined so much in the next 15 years
that in the third quarter of 2005 it was negative. During
the same period, household borrowing rose substantially:
Between 1990 and 2006 total borrowing increased by over
400 percent. Many economists noted that the situation was
not sustainable.1 (In the chart, the thick line is the personal
saving rate as a percentage of disposable income; the thin
line is total household borrowing, consisting of home
mortgages and consumer credit borrowing, in billions of
dollars.)
Households have responded to the
decline in wealth associated with falling
house and stock prices by drastically
reducing their borrowing and consump-
tion; as a result, they have increased
their savings. Household borrowing
reached a peak close to $1.4 trillion in
the second quarter of 2006. Since then
it declined precipitously, reaching nega-
tive $279 billion in the third quarter of
2008—implying that households are de-
leveraging by paying down (or default-
ing on) their debt. The chart also shows
the saving rate trending upward since
mid-2008. As of January 2009, the per-
sonal saving rate was at 5 percent of
personal disposable income.
As noted, home and equity price
declines affected household saving and
borrowing: Mid-to-late 2006 marks the
turning point for both series in the chart.
From its peak in 2006 to January 2009,
the median one-family home price has declined by over 25
percent, as measured by the National Association of Realtors.
The housing market turmoil also caused large losses for
financial institutions with significant holdings of mortgage-
backed securities and related derivatives. This led to an
across-the-board decline in equity prices: At the end of
February 2009, the S&P 500 had lost over 50 percent of its
value since its October 2007 highs. Overall, between the
third quarter of 2006 and the last quarter of 2008, Americans’
net worth shrank by 20 percent.
Household Retrenchment
Riccardo DiCecio, Economist
Charles S. Gascon, Senior Research Associate
“Economic misfortunes have caused
many to reassess their finances, 
triggering sharp reversals in 
borrowing and spending habits.”
–400
–200
0
200
400
600
800
1,000
1,200
1,400
1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008
–4
–2
0
2
4
6
8
10
12
14
Household Borrowing (left axis)
Personal Saving Rate (right axis)
Percent of Disposable Income $ (billions)
SOURCE: Federal Reserve Board and Bureau of Economic Analysis.
Household Borrowing and the Personal Saving RateAnother factor behind the reduction in borrowing and
the increase in saving is the tightening of credit market
conditions. In response to the turmoil in financial markets
and the reduction in household net worth, financial insti-
tutions have scaled back consumer lending programs.2
Although the increased saving rate is an unavoidable
adjustment, the magnitude of the reversal and its sudden
nature can be reasons for concern. ￿
1 See Massimo Guidolin and Elizabeth A. La Jeunesse, “The Decline in the U.S.
Personal Saving Rate: Is It Real and Is It a Puzzle?” Federal Reserve Bank of 
St. Louis Review, November/December 2007, 89(6), pp. 491-514.
2 See Silvio Contessi and Johanna L. Francis, “U.S. Commercial Bank Lending
through 2008:Q4: New Evidence from Gross Credit Flows.” Working Paper No.
2009-011A, Federal Reserve Bank of St. Louis, March 2009.
Economic SYNOPSES Federal Reserve Bank of St. Louis 2
research.stlouisfed.org
Posted on April 6, 2009
Views expressed do not necessarily reflect official positions of the Federal Reserve System.

Economic misfortunes have caused many to reassess their finances, triggering sharp reversals in borrowing and spending habits

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Economic misfortunes have caused many to reassess their finances, triggering sharp reversals in borrowing and spending habits

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