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http://dispatch.com/national-story.php?story=dispatch/2006/01/31/20060131-A1-02.html
Americans’ savings at lowest level since ’30s
Many spending more than they’re earning, government reports
Tuesday, January 31, 2006
Martin Crutsinger
ASSOCIATED PRESS
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WASHINGTON — Americans spent more than they made last year — something they haven’t done since the Great Depression, a time of massive unemployment and soup lines.
This time the trigger was good economic news — a booming housing market, which has made millions of American homeowners feel wealthier and more willing to spend with abandon.
Government statistics released yesterday showed they may have gone overboard with that spending, consuming all their after-tax income and then some.
The Commerce Department reported yesterday that Americans’ personal savings rate fell to minus 0.5 percent last year. That means people had to dip into savings or borrow more to finance their consumption.
The savings rate has been negative for an entire year only twice before, in 1932 and 1933 — when Americans were depleting savings to cope with massive job layoffs and business failures caused by the Great Depression.
Now, soaring home prices are making people feel wealthier. But this behavior could be risky at a time when 78 million baby boomers are beginning to move toward retirement. They start turning 60 this year, which means they can begin retiring with Social Security in just two more years.
With this huge wave of pending retirements, analysts said, the savings rate should be going up rather than declining, as it has over the past two decades. The savings rate stood at 10.8 percent in 1984 and has been falling steadily since.
"Americans seem to have the feeling that it is wimpish to save," said David Wyss, chief economist at Standard & Poor’s in New York. "The idea is to put away money for old age, and we are just not doing that."
Ken Mayland, president of ClearView Economics near Cleveland, said the monthly savings-rate report does not tell the full story, considering it does not account for gains on investments and rising home values.
"It makes a great headline, but it’s nothing to be scared about," he said.
Household wealth increased by $5 trillion during the 12-month period that ran through last year’s third quarter, more than double the $2.1 trillion that consumers have in total debt, Mayland said.
"The fact people are spending more than their paycheck is indicative of high confidence," he said. "It’s a leading indicator for the economy."
Analysts said rising home prices and a rebound in stock prices after the 2000 market collapse have many Americans feeling wealthier, and that effect is a major pillar supporting consumer spending.
"Americans have been content to spend a lot more than is good for them or for the economy," said Lyle Gramley, senior economic adviser at Schwab Washington Research Group.
After setting records for five straight years, home sales are expected to decline this year because of rising mortgage rates. The weaker sales will translate into slower price appreciation, which in turn will slow consumer spending, analysts said.
That slowdown in spending should help the savings rate return to positive territory. But analysts are not expecting sizable improvements in savings because baby boomers will start tapping their savings as they retire.
The expected slowdown in consumer spending is one reason many economists are looking for economic growth to slow further this year. The gross domestic product grew 3.5 percent last year, down from a five-year high of 4.2 percent in 2004.
The Federal Reserve is expected to boost interest rates again at its meeting today in an attempt to slow growth and keep inflation under control.
A price gauge closely watched by the Fed that excludes food and energy rose 0.1 percent in December, down from a 0.2 percent rise in November, the Commerce Department reported yesterday.
For December, consumer spending rose by a bigger-thanexpected 0.9 percent while incomes were up by 0.4 percent.
Dispatch Business Editor Ron Carter contributed to this story .
