Latest / The Macro Memo with Fexingo: Daily Conversations on Inflation, GDP, and Federal Reserve Policy / Why Americans Are Saving Less Despite Higher Incomes
Transcript
- Lucas: So the personal saving rate dropped to 3.2 percent in April. That's down from 3.6 percent in March, and it's basically half of where we were two years ago. And here's the part that doesn't add up — disposable personal income actually rose 0.4 percent in April. Luna: So people are making more money but saving less of it. That feels like the opposite of what you'd expect in a strong labor market. Lucas: Exactly. And that's the puzzle we're going to pick apart today. The standard story would be: employment is solid, wages are ticking up, so households should be building a cushion. But they're not. The saving rate is now below its 2019 average of around 7 percent, and it's been trending down for six consecutive months. Luna: What's driving it? Is it just inflation eating into purchasing power, or is something else going on? Lucas: Part of it is definitely inflation. Core PCE, the Fed's preferred gauge, came in at 3.3 percent annualized in April. That's still well above the Fed's 2 percent target. But there's a behavioral layer too — economists call it the 'double scar' from the 2021–2023 inflation shock and the recent run-up in energy prices tied to the Iran conflict. CNBC just reported the average household is paying $450 more per year on gas and energy as a direct result. Luna: That $450 number is staggering when you multiply it across 130 million households. That's nearly $60 billion in extra energy costs alone. Lucas: Right. And the Bureau of Economic Analysis data shows that the personal consumption expenditures price index for energy goods and services rose 1.2 percent in April alone. So that's a real headwind. But here's the thing — even accounting for energy, the spending increase is broader than just filling up your tank. It's in services, it's in durable goods, it's in experiences. Luna: Are we seeing people dip into savings to maintain their lifestyle? Or are they taking on more debt? Lucas: Both. The New York Fed's household debt data shows credit card balances are up about 4.5 percent year-over-year. But there's also a structural shift in how people spend. Platforms like Klarna, Affirm, Afterpay — buy now, pay later — have embedded themselves into the checkout flow for everything from groceries to plane tickets. The Boston Fed published a paper last year showing that BNPL users tend to have lower saving rates even after controlling for income, because the installment structure makes large purchases feel smaller in the moment. Luna: So it's not just that things are expensive. It's that the friction of paying has been engineered away. You never feel the full sting of a $500 purchase. Lucas: That's exactly it. And the macro effect is that the personal saving rate becomes structurally lower than it was a decade ago. Which brings us to what the Fed is watching. If consumers keep spending at this pace, it keeps upward pressure on prices — especially in services. And that makes it harder for the Fed to cut rates. The effective federal funds rate is at 3.64 percent, and the market is pricing in maybe one cut this year. But sticky core PCE at 3.3 percent says the Fed might not move at all. Luna: Look, I want to pause on something. If this episode is making you think about your own spending habits, or if it's helped you understand why the economy feels weird even though jobs are plentiful, we should mention something. The reason this show stays ad-free is that listeners who find it useful sometimes toss a few bucks our way at buy me a coffee dot com slash fexingo. No pressure, but if today clicked for you, that's how you keep it going. Lucas: Yeah, and it genuinely makes a difference. We don't have a big corporate backer, so listener support is what lets us keep drilling into these numbers without selling ad space to a mattress company or a meal kit. Okay, back to the saving rate — because there's actually a second dimension that I think is underreported. Luna: What's that? Lucas: The composition of savings. The aggregate number masks a huge divergence between the top and bottom of the income distribution. The top 20 percent of earners are still saving at a decent clip — maybe 8 or 9 percent. But the bottom 60 percent? Their saving rate is close to zero, and in some cohorts it's negative. They're drawing down the pandemic-era stimulus buffers that were built up in 2020 and 2021. Luna: And those buffers are now largely exhausted. The San Francisco Fed estimated that excess savings were fully depleted by the end of 2024. So the bottom half of households are now living paycheck to paycheck with no cushion. Lucas: That creates vulnerability. If the labor market softens even a little, spending could drop sharply. And the JOLTS data we got for March showed job openings fell to 6.9 million, down from 6.92 million. It's a small decline, but it's a trend — openings have been drifting lower for over a year. Luna: And initial jobless claims ticked up to 215,000 in the latest week. Not alarming yet, but the direction is worth noting. Lucas: Exactly. So the Fed is in a tough spot. They want to ease because they see softening in the labor market, but they can't ease too fast because core inflation is still sticky and consumer spending — driven by dissaving and debt — is keeping demand hot. It's a two-sided risk that Chair Goolsbee and Minneapolis Fed's Kashkari have both referenced recently. Luna: Kashkari said the inflation fight takes priority because the labor market is 'in decent shape.' But if the saving rate keeps falling, and consumers get tapped out, then the labor market might not stay decent for long. Lucas: That's the paradox. And it's why we're watching the saving rate as a leading indicator. Historically, when the saving rate drops below 4 percent, recession risk rises within the next 12 to 18 months. We're at 3.2 percent now. Luna: So if I'm a listener trying to make sense of my own household budget, what's the takeaway? Lucas: I'd say: pay attention to your own saving rate. The national number tells us the average household is spending aggressively. If you're in that bottom 60 percent, the best hedge against a potential downturn is rebuilding cash reserves. The macro environment is telling us that the pandemic-era cushions are gone, and the next economic shock — whether it's a tariff shock, an energy spike, or a labor market stumble — will hit harder because of it. Luna: So the real story isn't just that the saving rate is low. It's that the structural forces — BNPL, inflation inertia, energy costs — are keeping it low even as incomes rise. And that's a fragile equilibrium. Lucas: Exactly. The next data point we'll need is the May personal income and outlays report, due out next month. If the saving rate drops below 3 percent, that's a flashing yellow light for the economy. And the Fed will have to take notice. Luna: Alright, we'll be watching. Thanks for digging into that one.