One explanation as to why we haven’t seen a recession in the United States since 2009 may be that during and after the Great Recession of 2008, the US private sector began accumulating savings at an unprecedented pace in postwar history.
Below is a chart of US private sector savings since 1929:
As you can see here, a dip in private saving, followed by a reversal has preceded a recession 9 out of 13 times. Some recessions, such as the Great Depression (from what it looks like), the post-WW2 recession and the Great Recession of 2008 were even preceded by private saving going negative. Negative US private sector saving basically means that US individuals on the net become indebted to the public and/or the foreign sector. (I will go into details of sectoral balances in a separate post.)
The causality between recessions and saving might be interpreted as follows: As a general rule, the domestic private sector has a propensity to net save financial assets (basically cash, bank reserves, and government bonds). However, at times, for reasons that I won’t get into in this post quite yet, private individuals’ net saving slows down. At the same time, businesses also slow down their pace of net saving.
There comes a point, however, where the domestic private sector as a whole becomes unwilling to reduce their pace of net saving any further. The trend reverses, private spending is reduced (or debts are repaid/foreclosed on), and saving rises again. The ensuing reduction in consumer spending forces businesses to produce and invest less, and a recession ensues.
During and after the recession the process of running up savings again continues until a point is reached where people are comfortable spending more again and we begin where we started.
Recent examples of negative private saving were the recessions of 2001 and 2008. Then, as I mentioned, in 2009 the level of private saving had reached record levels that had not been seen since 1946!
Since then the US private sector has been slowing down its pace of saving yet again and it is yet to be seen how low it can go this time. But we can make an educated guess that the lower it goes, the more severe the ensuing adjustment will be.
Look out for the next reversal in this trend, it may be a strong recession indicator!
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