Economists split over negative U.S. savings rate

February 02, 2007|By Tricia Bishop | Tricia Bishop,Sun reporter

For the second year in a row, Americans spent more than they earned - $116 billion more in December alone. That's causing scores of economists to wring their hands over the lack of financial foresight, which could have disastrous effects on the economy if consumers suddenly, and widely, overcorrected the problem.

But the figures, announced yesterday with the release of new U.S. Department of Commerce data, might not be as bad as many think. In fact, they just might say more about the changing nature of wealth than about the country's careless cash outlay.

"It's a matter of some concern because there is a large number of households who have been borrowing aggressively to supplement their income, and their financial situation is weakening," said Mark Zandi, chief economist with Moody's in West Chester, Pa. "I don't think it's a matter of overwhelming worry, however."

Since the Great Depression, the country's "personal savings rate" (the amount left over after disposable income is used up) was positive. That changed in 2005 when it dipped into negative territory for the first time since 1933.

The situation grew worse last year, according to the data, which means Americans are spending more than their current incomes, most disturbingly by borrowing against their homes or on their credit cards.

But the rate, now at a negative 1 percent compared with 2005's negative 0.3 percent, doesn't factor in spending by those who have nest eggs from prior years, whether from pension payouts, home equity, successful stock portfolios or big bank accounts. Capital gains are not included in the savings rate.

Some Americans are simply cashing in a portion of their stored-up wealth.

"If you invested in a stock market in 1982 and held a lot of stocks in your portfolio for the last 25 years, you've sustained one of the largest bull markets in history and kind of gotten rich by not doing anything. And what you can afford to do is, you can afford to spend some of that money," said Albert S. "Pete" Kyle, the Smith Chair Professor of Finance at the University of Maryland's Robert H. Smith School of Business.

"I think that is the main reason that the savings rate in the U.S. is so low: Americans own a lot of stock."

Times were different during the Great Depression. Stocks took a dive for a sustained period, people were fired, and they quickly used up whatever savings they held. If that were happening today, the negative savings rate would be much more troubling, said economists, who also cautioned that yesterday's numbers are preliminary and could be revised.

Still, some worry about certain Americans, particularly those whose future wealth is measured solely by their homes' value.

Charles W. McMillion, a Washington economist and president of MBG Information Services, has followed the negative savings rate for months, warning homeowners that house prices have fallen. Those who have borrowed against their homes' equity on the assumption that prices will rise indefinitely will soon have to pull back on their spending.

If people panicked and did that en masse, it could slow the economy as a whole, though financial forecasters said that's unlikely.

David Wyss, chief economist at credit-rating company Standard & Poor's, acknowledges that fortunes are increasing and the stock market is doing well.

But he still believes there's something telling about the savings rate, whether it's just low or negative.

"Even though wealth is doing OK, we're just not saving enough to retire on, and for us baby boomers, retirement is approaching awfully fast, that light at the end of the tunnel is getting very close," Wyss said. "We need to be saving more money now."

The average person over age 55 has less than $100,000 in his or her portfolio, which doesn't make for much of a retirement if Social Security is the only other supplement, Wyss said. To live a typical middle-class lifestyle, that figure should be more than $1 million.

Wyss is hoping the trend turns around, but he's not holding his breath. He's also not buying some colleagues' claims - such as those in a recent New York Times article - suggesting Americans, particularly young ones, might be saving too much.

"I find that a very silly [suggestion]," Wyss said. "The idea that it's good to live beyond your means, to me, is an indictment on the education system."

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