Why Did Savings Decline In The Third Quarter?

On Wednesday, I wrote about the odd observation that over the past year workers' hours have decreased while consumption spending has essentially been flat. One thing I noted was that savings have increased over the same period. One commenter, mgoodfel, requested a chart showing that decline. I added one, but in doing so noticed something kind of unexpected: savings suddenly decreased in the third-quarter of this year. What's going on here?

First, here's that chart, based on Bureau of Economic Analysis data:

Personal Saving BEA 2009-11.PNG

That's a 32% decrease from Q2 to Q3. I can think of a several potential causes.

The most obvious would be that consumers feel that they've saved enough and can start spending again. But with unemployment soaring above 10% and wages stagnant, I find this explanation a little hard to swallow. Consumer confidence hasn't improved proportionally.

But the stock market has rallied over the past several months, and real estate prices aren't falling as quickly. That could lead people to believe they don't need to save as much. Still, I understood most of the increased savings as more of a buffer for uncertainty than to make up for investment losses. Besides, even though savings increased, I don't begin to believe that Americans' increased saving over the past year has neutralized all of their stock market and real estate losses since 2007 highs. So I can't see the improvement in investments as a reason to stop saving either.

One more likely explanation could be the government programs that encouraged spending. Cash-for-clunkers and the first-time home buyers' credit come to mind. Both programs would require down payments on cars or houses. That would drain savings. Their presence was certainly felt in the third quarter, which is the period in question. If this is the case, in the fourth quarter, savings might continue to decrease, but probably by a smaller amount since clunkers is over and the home buyers' credit extension won't send Americans to rush to buy houses.

Another likely reason for draining savings is, well, the need for money. For many Americans, unemployment benefits are running out. For others, those benefits don't cover all their expenses. As a result, they have to dip into savings, or save less than they wish they could. The longer high unemployment persists, the harder it will be for effected Americans to keep saving. Unfortunately, consumption won't benefit, since those individuals won't have extra money to spend either.

With all this considered, I expect the decrease in savings to have likely been a combination of all four of these factors. But I think the last two dominate. With unemployment at 10.2%, it's hard to argue that consumer sentiment could have much to do with it.

Update: For anyone interested, here's that graph going back a bit further.

Personal Saving BEA 2009-11 - 2.PNG