Posted on 01/30/2006 12:06:05 PM PST by Reagan Man
Americans are spending everything they're making and more, pushing the national savings rate to the lowest point since the Great Depression.
Soaring home prices apparently have convinced people they don't have to worry about saving, a belief that could be seriously tested as 78 million baby boomers begin to retire.
The Commerce Department reported Monday that Americans' personal savings fell into negative territory at minus 0.5 percent last year. That means that people not only spent all of their after-tax income last year but had to dip into previous savings or increase their borrowing.
The savings rate has been negative for an entire year only twice before _ in 1932 and 1933 _ two years when Americans were having to deplete savings to cope with the massive job layoffs and business failures caused by the Great Depression.
This time the reasons for the negative savings rate are vastly different. Americans are spending all their incomes and then some because they feel wealthier because of soaring value of their homes, which for many Americans is the largest investment they own.
But analysts cautioned that this behavior was risky at a time when 78 million Americans are on the verge of retirement. The baby boomers start turning 60 this year, which means they can begin retiring with Social Security in just two more years.
Analysts said with this huge wave of pending retirements, the savings rate should be going up rather than being on a steady decline over the past two decades. The savings rate stood at 10.8 percent of after-tax incomes in 1984 and has been declining steadily since that time. It was down to 1.8 percent in 2004 before turning negative last year.
"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."
Analysts said that not only rising home prices but a rebound in stock prices following the 2000 market collapse have many Americans feeling more wealthy, and that wealth 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, sales of both existing and new homes are expected to decline this year under the impact of rising mortgage rates. The weaker sales will translate into slower price appreciation which in turn will slow consumer spending, analysts are forecasting.
That slowdown in spending should help the savings rate rise back into positive territory. But analysts are not expecting sizable improvements in savings, because as baby boomers begin to retire they will start tapping into their savings to pay for medical bills and other consumption.
The expected slowdown in consumer spending is one reason many economists are looking for overall 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, trying to engineer a slowdown in growth that will keep inflation under control, is expected to boost rates for a 14th time at its Tuesday meeting.
A price gauge closely watched by the Fed that excludes food and energy rose by a tiny 0.1 percent in December, down from a 0.2 percent rise in November, the Commerce Department reported Monday.
For December, consumer spending rose by a bigger-than-expected 0.9 percent while incomes were up by just 0.4 percent. That forced the savings rate down for the month to a negative 0.7 percent.
There are probably going to be a lot of boomer's kids who don't get as big a windfall as they expected when mom and dad kick off.
I'm sure there are lots of other factors that figure into the mix, but the aforementioned is pretty basic knowledge.
I wonder what the "investment rate" is?
Savings started dropping when the IRS first decided they could tax the interest on savings accounts. That whack, with the potential for moving up in taxable income, and income bracket, coupled with the relatively low rate banks pay, has led to the situation we have today. Want to see people save? Exempt savings interest from taxable income.
It's not clear what is meant by "savings". Is this just demand deposits, or does it include 401(K) retirement accounts? If the former, then no wonder - Americans are and have for years been shifting long-term savings into retirement investment accounts, not low-interest bank accounts.
Hard to believe with the advent of 401k's, IRA's etc over the last couple of decades. Some of the easiest and most painless ways to put money away.
The savings rate stood at 10.8 percent of after-tax incomes in 1984
I find that figure very hard to believe. I doubt that over 10 percent of after tax incomes were being saved back then.
"It's not clear what is meant by "savings"."
I agree. Its not. But from things I've read about this in the past I ~believe~ this does include pretty much all forms of investment instruments too.
What it doesn't include however, is the "investment" in your home. I think the argument there is that if its your primary residence, its not really an "investment" but rather just a place to live.
Wow... I must be the only person in the US that is actually saving money.
:-)
***Savings started dropping when the IRS first decided they could tax the interest on savings accounts. That whack, with the potential for moving up in taxable income, and income bracket, coupled with the relatively low rate banks pay, has led to the situation we have today. Want to see people save? Exempt savings interest from taxable income.***
I agree. Any money you put into savings is money that has already been taxed. That makes taxing the interest on it DOUBLE taxation.
Just one of the things for which I'm grateful to him.
"Wow... I must be the only person in the US that is actually saving money."
Well... You, plus me and my wife!
I see "savings" as being net worth...particularly that which doesn't include the equity you have in your primary residence.
IRA's,stock portfolios,pensions due and other things.
Include me,my brother and sister.(see post #12)
Your Dad sounds like a good fiscal conservative.
He was,although I think his attitude was fairly common among those of his generation.
I don't know if you've ever read "The Millionaire Next Door" or not,but a lot of the traits in that book were found in my Dad.Basically,it says that the "typical" millionaire in this country is "first generation rich", lives in a nice,but not fancy,neighborhood,tends to drive a fairly modest car,etc,etc....just like my Dad (not that my Dad was rich...).
Agree. I have to wonder if they included 401ks in this calculation.
Yes it was. My Mom&Dad were products of the Depression too. They never had a credit card. Not one. We lived lower middle class. We had everything we needed, only some of what we desired. My parents owed three houses. One brand new home on Long Island in the fantastic fiftes, the 1950`s that is. My Mom handled the money matters. A first rate saver of Dad's hard earned cash.
Hmmmmm? The Commerce Dept? Something smells fishy here. Since when did the Commerce Dept start paying attention to individual accounts? That's more a job for the Fed or Treasury (IRS could do the calculation). Seems to me that this is a little out side the Commerce Dept's field of expertise.
Are they looking at the nations civilian total dept to equity ratio or individual debt to equity ratio.
If it's only a 1/2 of one percent deficit for the total civilian economy, I'd say that is pretty damn good number, in fact excellent and indicative of a rapidly growing economy where investments are being made. (Japan's economy has been in the dumps for years because their savings numbers have been way too positive. (Too much savings and no place to invest it = stagnation.)
If it is personal debt to equity, I still wouldn't say it is necessarily a bad figure. You would need to analyze what demographic segments are the net debtors. If it is heavily on those under 40, it is still not a bad thing. For the over 40 set, I find it difficult to believe the numbers are negative.
That said, we still need to reel in credit card debt. Incurring debt for current consumption is not a good thing.
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