Americans continue to collectively outspend their income. Although final numbers are not yet in, it appears that the personal savings rate was negative in 2006 for the second consecutive year.
The Bureau of Economic Analysis calculates the personal savings rate by subtracting personal outlays (spending on goods and services, plus interest payments) and tax payments from personal income. What’s left over is considered to be savings. Personal income is calculated generously—it includes not just payroll income, but also rental income, dividends, Social Security and other government payments, and even employers’ contributions to employees’ retirement plans.
Link to Credit Union Share Growth
Credit union share growth has decelerated from about 16% at the end of 2001 to 4.6% at mid-year 2006. During the same period, the nation’s personal savings rate has fallen from about 2.0% to -1.0%. As the chart below illustrates, the two data series tend to track each other directionally, but the order of magnitude differs. Furthermore, the relationship between the two series can diverge based on market dynamics like the current phase of the interest rate cycle and investors’ willingness to make investments in the equity and bond markets.
For example, credit union share growth far outstripped the growth in personal savings in 2001 and 2002. Personal savings growth was range-bound around 2%, but credit unions grew shares at double-digit rates for more than two years. What caused this divergence, and can we expect it to happen again?
Two factors contributed to the attractiveness of credit union shares during that period relative to other places that individuals could put funds. First, the stock market was working through the excesses of the late 1990s during that period and many investors threw in the towel. In a flight to quality, investors developed a temporary preference for stable, liquid holdings that would not lose value. Second, interest rates were falling and credit unions’ rate adjustments lagged the market, making credit union shares more attractive than alternatives.
Market dynamics shifted again beginning in 2003, when the stock market began to recover and generate positive returns. In 2004, the Fed began raising interest rates. Credit unions lagged the market in rate adjustments once again and seeing improved market tone and more potentially lucrative alternatives in stocks and bonds, many individuals have directed their available funds elsewhere. Others, seeing their overall assets grow, spent their available funds—and then some.
Negative Savings Rate Challenging, but Not Determinative
The negative personal savings rate is a headwind, but it is not the only determinant of share growth. Pricing, convenience and overall member value have the potential to offset the challenge posed by this trend. While it now appears that we shouldn’t expect near-term interest rate cuts, a slowdown in equity market appreciation could help to reorient individuals’ preferences toward credit union savings vehicles.