Savings rate has gone negative

[Dissipate]

Associated Press
Savings Rate at Lowest Level Since 1933

Americans' personal savings rate dipped into negative territory in 2005, something that hasn't happened since the Great Depression. Consumers depleted their savings to finance the purchases of cars and other big-ticket items.

The Commerce Department reported Monday that the savings rate fell into negative territory at minus 0.5 percent, meaning that Americans not only spent all of their after-tax income last year but had to dip into previous savings or increase borrowing.

The savings rate has been negative for an entire year only twice before - in 1932 and 1933 - two years when the country was struggling to cope with the Great Depression, a time of massive business failures and job layoffs.

With employment growth strong now, analysts said that different factors are at play. Americans feel they can spend more, given that the value of their homes, the biggest asset for most families, has been rising sharply in recent years.

But analysts cautioned that this behavior was risky at a time when 78 million Americans are on the verge of retirement.

"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."

The Commerce report said that consumer spending for December rose by 0.9 percent, more than double the 0.4 percent increase in incomes last month.

A price gauge that excludes food and energy rose by a tiny 0.1 percent in December, down from a 0.2 percent rise in November. This inflation index linked to consumer spending is closely watched by officials at the Federal Reserve.

The central bank meets on Tuesday, when it is expected it will boost interest rates for a 14th time. However, many economists believe those rate hikes are drawing to a close with perhaps another quarter-point hike at the March 28 meeting as the central bank is starting to see the impact of the previous rate hikes in a slowing economy.

The government reported on Friday that overall economic growth slowed to a 1.1 percent rate in the final three months of the year, the most sluggish pace in three years.

That slowdown was heavily influenced by a big drop for the quarter in spending on new cars, which had surged in the summer as automakers offered attractive sales incentives.

A negative savings rate means that Americans spent all their disposable income, the amount left over after paying taxes, and dipped into their past savings to finance their purchases. For the month, the savings rate fell to 0.7 percent, the largest one-month decline since a 3.4 percent drop in August.

The 0.5 percent negative savings rate for 2005 followed a 1.8 percent rate of savings in 2004. The last negative rates occurred in 1932, a drop of 0.9 percent, and a record 1.5 percent decline in 1933. In those years Americans exhausted their savings to try to meet expenses in the wake of the worst economic crisis in U.S. history.

One major reason that consumers felt confident in spending all of their disposable incomes and dipping into savings last year was that a booming housing market made them feel more wealthy. As their home prices surged at double-digit rates, that created what economists call a "wealth effect" that supported greater spending.

The concern, however, is that the housing boom of the past five years is beginning to quiet down with the rise in mortgage rates. Analysts are closing watching to see whether consumer spending, which accounts for two-thirds of total economic activity, falters in 2006 as Americans, already carrying heavy debt loads, don't feel as wealthy as the price appreciation of their homes would seem to indicate.

For December, the 0.4 percent rise in incomes was in line with Wall Street expectations. It followed a similar 0.4 percent increase in November, with both months lower than the 0.6 percent rise in October.

The 0.9 percent rise in spending with slightly above the expectation for a 0.8 percent increase and was almost double the 0.5 percent increase in November.

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America could be in for some tough times. People are basically going into debt by borrowing against the inflated values of their home caused by the housing bubble. Savings is now negative and gold is going very strong. Something bad could be around the corner...

 

[ericlp]

You ever notice the ads on TV's these days. What is it? Country Wide? or... Lost another loan to ditech, or lending tree.

There are sure a lot of refi's going on to consolidate loans to be stacked up against the house...

I agree, the ONLY thing keeping America alive is the housing/property market. If that goes down the tubes the country is done for... Maybe it is time we all start buying gold.

Realistate is over hyped and no one can afford it. It's turning out to be a BAD investment.
I'd sure hate to be the one buying a half million dollar house only to be left holding the bag when it crashes and you wake tomorrow to find out the "investment" you purchased is now only worth half of it's value. Whoa!

 

[JS80]

Savings rate does not take into account gains in investments and money diverted to 401k and other retirement accounts. You can't compare today to 1933.

 

[techs]

The economy is a disaster. Mediocre performance despite huge deficit spending.
The greatest propaganda coup for Bush is actually convincing anyone at all that things are going well.
Unfortunately the crash the US is facing will be catastrophic.

 

[Genx87]

Originally posted by: techs
The economy is a disaster. Mediocre performance despite huge deficit spending.
The greatest propaganda coup for Bush is actually convincing anyone at all that things are going well.
Unfortunately the crash the US is facing will be catastrophic.

I love how people think 4% GDP growth with 5% unemployment is a disaster. We as a nation are like spoiled children at times.

 

[dullard]

This thread is worthless without this pic. Hopefully that graph will eventually be updated for the savings declines that have continued past mid 2005.

Originally posted by: JS80
Savings rate does not take into account gains in investments and money diverted to 401k and other retirement accounts. You can't compare today to 1933.

That is true. But, we can't spend those gains forever. At some point in time, those gains will have been wiped out. What happens to the economy when that happens? In 2004 (the latest full year data released), 7% of consumer spending was from taking equity back out of homes and the like. 7%! The refinancing cannot continue forever. We cannot drain the 401k forever. What happens when that 7% disappears? Talk about a likely recession.

 

[Genx87]

Originally posted by: dullard
This thread is worthless without this pic. Hopefully that graph will eventually be updated for the savings declines that have continued past mid 2005.

Originally posted by: JS80
Savings rate does not take into account gains in investments and money diverted to 401k and other retirement accounts. You can't compare today to 1933.

That is true. But, we can't spend those gains forever. At some point in time, those gains will have been wiped out. What happens to the economy when that happens? In 2004 (the latest full year data released), 7% of consumer spending was from taking equity back out of homes and the like. 7%! The refinancing cannot continue forever. We cannot drain the 401k forever. What happens when that 7% disappears? Talk about a likely recession.

Maybe people took our equity loans at 6-7% to pay off CC debt that was north of 10%?
There was a story I read last week about the change in the bankruptcy laws have changed peoples views on finances and now one of the biggest things people are doing is paying down CC debt.

 

[dullard]

Originally posted by: Genx87
Maybe people took our equity loans at 6-7% to pay off CC debt that was north of 10%?
There was a story I read last week about the change in the bankruptcy laws have changed peoples views on finances and now one of the biggest things people are doing is paying down CC debt.

I didn't say that they were doing bad things with those refinances. I simply said that they cannot do it forever.