For the past year, Secretary of the Treasury Tim Geithner has repeatedly warned, "People were living beyond their means for a long period of time. And so inevitably we were going to go through a very difficult transition as people save more, reduce their debt burdens." That Americans have engaged in an extended period of excess consumption and inadequate savings is obvious. But it is refreshing when a senior public official acknowledges the facts. How many elected officials would tell their constituents that they had consumed too much and saved too little?

One way to gauge the consumption patterns of American consumers is to look at their personal savings rate. This data is reported by the Department of Commerce. Looking back at the 50 year history of this index helps explain the transitions that have occurred and provides insight into future consumer behavior. Given the fact that consumers have accounted for 70 percent of the Gross Domestic Product (GDP), changes in their spending and saving patterns will have profound impacts on future economic growth.

The Department of Commerce defines the personal savings rate as follows: It starts with personal income, which includes wages (from a job or self-employment), dividends, interest, rental income, and employer contributions to health and retirement plans. From this total it subtracts income tax and the employee's share of payroll taxes. The difference is disposable personal income. It then subtracts consumer non-investment expenditures, including retail purchases, utilities, and interest payments on consumer debt. For housing, the bureau deducts rent for renters or mortgage interest, property taxes and insurance for owners. It does not subtract down payments or principal payments on a house, as it considers these to be investment expenditures. What's left is personal savings.

The Department of Commerce started reporting the personal savings rate in 1959. For the next 26 years, until 1985, the rate averaged over 9 percent per year. For much of that period rates were in the 9 to 10 percent range. Beginning in 1985, the savings rate began a steady 20 year decline. In 2005, the saving rate fell to 1.4 percent, its lowest level since data was first collected in 1959. Most economists believe that the 2005 level was the lowest since the Great Depression.

As the recent recession took hold, the savings rate climbed. In 2009, the rate climbed to 5.9 percent, a level last seen 17 years earlier in 1982. The rate normally climbs during a recession because consumers cut back on spending and increase savings. It reached 14.6 percent in the 1974-75 recession and 12.2 percent in the 1981-82 recession.

For the investor with a macroeconomic focus, the critical questions are what will be the savings rate going forward and what impact will the rate have on economic growth. Economists have suggested three possible scenarios: (1) a return to the 9 to 10 percent level prior to the decline beginning in 1985; (2) the rate remaining at approximately its current level of near 6 percent, which is also the average rate over the 50 years in which the rate has been reported; (3) a return to levels below 4 percent, seen for much of the decade prior to the current recession.

A thoughtful analysis by Charles Steindel of the New York Federal Reserve Bank published in 2007 suggests that there are several reasons why the savings rate may stay at current levels or climb even higher over the coming decade. Steindel argues that the savings rate has increased and may stay elevated because of (a) uncertainty about future income; (b) restricted ability to borrow money; and (c) a reverse wealth effect.

• The current economy is at a point of high uncertainty. Many businesses that had stable earning records are now confronted with what may be a lengthy period before the economy stabilizes. The owners and participants in these businesses may now determine that it is prudent to put aside money as a safety net.
• The widespread tightening of credit makes it more difficult for individuals to borrow and spend, creating savings as a default. The availability of credit for car and home loans has been substantially reduced, thereby making it more difficult for consumers to spend by trading up.

The wealth effect may be the most important contributor to increased savings. For decades, home prices rose year after year. Homes are the largest investment of most American families. They have relied on them to build a retirement nest egg. But after more than 50 years of uninterrupted increases, prices fell in this recession. In the future, prices may continue to fall or stay flat for an extended period. The long and deeply held expectation that home prices would steadily rise is now in doubt. The homeowner who was counting on the price of his home to grow steadily may now realize that there is a greater need to save in order to have enough for a comfortable retirement.

The investor is also faced with a new reality. Between 1982 and 2000, the stock market produced handsome returns. Retirees in 2000 were commonly told that they could expect a 10 percent per year return from the S&P 500 over the long run. For the decade starting 2000, returns on most mainstream stock investments have been negligible. In addition, interest rates on CDs and money markets are so low that they do not provide a meaningful income. For individuals over 40 looking ahead to retirement, saving money may now be seen as a necessity.

Former Federal Reserve Board governor Lyle Gramley has argued that recent financial difficulties have taught Americans the true value of personal savings: "Consumers have learned a bitter lesson that their past behavior takes them way out on a limb that might get sawed off. They can't count on the increase in the value of their home or their 401(k) to do all the saving they need to fund their retirement years or to educate their children or for medical contingencies. They're going to have to do some of the savings themselves, so I think that will motivate a gradual rise in the savings rate," he said according to Bankrate, adding that he wouldn't be surprised to see the personal savings rate hit 8% in the near future, a level not seen since the 1950's-1980's period

As the past two years have demonstrated, a 6 percent saving rate going forward will result in lower consumption and lower overall growth. A 10 percent savings rate would result in even greater economic difficulties. A 2009 study by the San Francisco Federal Reserve suggested that a 10 percent savings rate would reduce GDP by three quarters percent annually over the next decade. The current long term trend of GDP growth is 2.7 percent. A 0.75 percent reduction would leave a growth rate of 2 percent per annum. Economist Paul Krugman has stated that in order for the economy to be self-sustaining a 2.5 percent or higher growth rate is required. Former Fed Chair Alan Greenspan made that same observation over a decade ago.