Nevertheless, on the issue of why the personal saving rate has fallen, empirical evidence linking the stock of wealth to consumption spending supports the view that capital gains on corporate equities and residential real estate have been important factors. Another explanation for the decline in the personal saving rate relates to possible upward revisions to households’ expectations for their long-run or permanent income.
Many studies of household consumption and saving behavior link current consumption to both current income and expected future income as households appear to smooth spending in response to fluctuations in income.4 One consequence of this behavior is that the ratio of consumption to current income will be higher - and hence the personal saving rate will be lower - the higher is the expected growth rate of future income.