How much to put into savings—long a subject of kitchen-table discussions— was a question of renewed interest among Americans as the country encountered the coronavirus pandemic.

Entering the second quarter of 2020, Americans’ fears of the pandemic were ramping up amid record job losses and the worst economy since the Great Depression. Those without jobs wondered how they would pay bills, while those with jobs either stopped spending or, at

least, found fewer places to spend.

In response, the country went on an unprecedented saving spree. And while the response to the economic downturn was similar to what occurred in other recessions, the magnitude was sharply different. A. Lee Smith, a research and policy advisor in the Economic Research Department of the Federal Reserve Bank of Kansas City, analyzed savings rates in the United States in a December 2020 Economic Bulletin titled “Why Are Americans Saving So Much of Their Income?”

Smith documented a sharp increase in savings as a percentage of disposable personal income, from 7.2% in December 2019 to a record high of 33.7% in April 2020. From March to April of 2020 alone, the savings rate nearly quadrupled.

“That means that for every $100 of disposable income, consumers saved $7 in December,” Smith said, “and by April consumers were saving almost $34 of every $100 of disposable income.”

Since reaching its historic high in April the savings rate has slipped a bit but remains elevated at about 14% or nearly twice as high as it was prior to the pandemic and higher than its peak in any recent recession. Perhaps unsurprisingly, personal savings rates tend to increase when the economy is in a downturn, causing consumers to be more reluctant to spend. Smith documents rates from past recessions, including the Great Recession of 2007-09 and the current pandemic-induced recession.

“The desire to save during recessions reflects a natural response to the fact that employment opportunities are scarcer in recessions and the value of investments like stocks and housing tend to fall in recessions,” he said. “This leads households to desire greater savings buffers to lean against should they find themselves unemployed.”

A different recession

Smith said the pandemic has caused a recession unlike any others, and the difference might help explain the sharp rise in savings. He examined two key factors that contributed to the increase:

  • Large fiscal transfers, including stimulus checks and unemployment benefits, which boosted incomes at a time when much of the economy was closed.
  • An increase in precautionary motives as consumers became more reluctant to spend amid heightened uncertainty.

Stimulus checks of $1,200 per person were part of the Coronavirus Aid, Relief, and Economic Security Act, known as CARES, that was signed into law in March 2020. A second relief package in December included stimulus checks of up to $600 a person. CARES also included an extra $600 a month in unemployment benefits between April and July.

These transfers allowed many households, primarily ones that lost jobs or income, to meet basic necessities. On the other hand, for households fortunate enough to remain employed, the transfers may have facilitated a desire to build a savings buffer.

“The generosity of transfers has been such that some households have been able to both spend a bit more and save a bit more than they otherwise might absent fiscal support,” Smith said.

As for precautionary savings, Smith said they broadly refer to an increased desire to save today to guard against a future risk or uncertainty.

“In the present context, it’s not hard to imagine what risks and uncertainties might be prompting this type of savings,” he said. “There is a great deal of uncertainty surrounding the economic outlook due to the many unknowns around the evolution of the virus. Moreover, the imposition of economic restrictions last spring exposed many households to a level of income risk that was previously unimaginable as many workplaces were closed.”

Another factor driving savings rates, he said, is that the ongoing nature of the pandemic has caused households to conclude they may need to set aside even more than ever for a rainy day. Financial advisors have been building upon the former recommendation of having at least three months of income in savings as a buffer, increasing that recommendation to six or even 12 months of income in savings.

“In the face of this unsettling situation, saving more seems a perfectly reasonable response,” he said. That, of course, assumes that all things are equal, and in the pandemic recession that’s far from the case. And while Smith’s research looked at the U.S. population as a whole and didn’t explore effects of different demographic groups, his findings overall are illustrative of individual trends.

His look at aggregate numbers for the whole population show that over 2020, excess savings, or savings above what might be normal, totaled almost $2 trillion.

“This money is, however, not divided equally among the population,” he said. “While many Americans may want to save more these days, only those who were fortunate enough to maintain their livelihoods have actually been able to save more.”

The flip side

Meanwhile, as consumers were setting records for savings, their spending patterns were experiencing a roller-coaster ride of sharp ups and downs amid dramatic shifts in the mix of goods and services Americans were willing or able to purchase.

In an Economic Bulletin published in February titled “Consumer Spending Declines, Shifts in Response to the Pandemic,” Alison Felix, a senior policy advisor at the Bank, and Research Associate Samantha Shampine, documented how consumer spending fell sharply early in the pandemic, then rallied somewhat in following months, but still remained below year-ago levels through 2020.

Felix found that some of the same factors that affected savings rates, such as unemployment, changes in income and restrictions on activities, also affected consumer spending, and ultimately the economy overall. Early on, consumer spending fell more than 10% before bouncing back in the second half of 2020. Despite the uptick, overall spending remained below year-ago levels.

Felix found that some of the same factors that affected savings rates, such as unemployment, changes in income and restrictions on activities, also affected consumer spending, and ultimately the economy overall. Early on, consumer spending fell more than 10% before bouncing back in the second half of 2020. Despite the uptick, overall spending remained below year-ago levels.

The pandemic also resulted in a significant shift in what consumers were willing or able to spend on, especially within the services sector. Unsurprisingly, Felix found the largest declines were in services with heavy COVID-19 restrictions, such as foreign travel and movie theaters. Also, spending on transportation, hotels and motels, and hairdressing salons and personal grooming services, declined sharply.

Spend it or save it?

Smith said the “$2 trillion question” is what are Americans going to do with their increased savings when the economy regains a more normal footing. He adds that Americans who saved based on precautionary motives may be hesitant to tap savings in the future for consumer spending, choosing instead to continue to save for a rainy day.

Conversely, those fortunate enough to continue working during the pandemic may essentially have been forced to save more since many parts of the economy remain closed. Some of this forced savings, he added, could be earmarked for future vacations, for example.

Smith cautioned that estimates of which motive is driving consumers to save is “imperfect.” His analysis suggests that historical patterns of government transfers, savings and consumption indicate much of the recent increase in savings is due to precautionary motives.

“Therefore, this analysis cautions against the thought that all of this savings will be drawn down once the pandemic ends,” he said. “The lasting effects of this pandemic on consumer behavior remain largely unknown at this point.”

One possible silver lining in the current downturn, is that its effects may be much different from recent downturns, particularly the most recent, the 2007-09 Great Recession. One of the major effects of the global financial crisis and the Great Recession was the loss of household wealth amid a crash in housing prices.

“This pandemic has been very different, as household wealth has actually increased,” Smith said. “That’s one reason to be optimistic: that even if the stock of accumulated savings isn’t drawn down, the savings rate will move back to pre-pandemic levels once this crisis ends.”

Read the research

Go to External to read the Economic Bulletins on savings rates and spending during the pandemic.

Listen to the podcast

Hear our TEN Talk podcast on savings rates during a pandemic at External

Kansas City Fed education resources for savers

The Kansas City Fed offers free economic and personal finance resources for educators, bankers and consumers. Individuals of all ages who understand how the economy functions and know what tools are available make better financial decisions.

For example, elementary school students may benefit from “Bunny Money,” “Financial Fables” or “There’s No Business Like Bank Business.” Older students and adults may be interested in “Financial Fundamentals from the Fed – Savvy Savers,” “Recession Lessons – Savings Habits,” “The Money Circle” or “Putting Your Paycheck to Work.”

Find these resources and more at External