Americans' savings rate drops to Depression era-low
Posted: 05 February 2007 0154 hrs

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WASHINGTON : Americans spent more than they earned last year as the economy steamed ahead, pushing the personal savings rate to negative 1.0 percent, the deepest hole since the Great Depression of the 1930s.

The figure, published last week by the US Commerce Department, means that not only did Americans spend all their income, they dug into savings and used credit to buy more.

Over the past seven decades, the personal savings rate - the difference between post-tax, or disposable, income and spending - has been in negative territory only four times: 1932, 1933, 2005 and 2006.

In the 1930s, the Great Depression explains why Americans had to dip into their savings at a time when a fourth of the workforce was out of a job.

But in 2006 and in 2005, when the personal savings rate slipped to negative 0.4 percent, the economic situation was far different, which bothers economists.

"It's surprising, especially in a period with the economy growing so strongly," said Martha Starr, an economics professor specialised in savings and consumption issues at American University in Washington.

The US economy grew by a robust 3.4 percent in 2006 - consumer spending accounts for about two-thirds of US economic output - and the unemployment rate ended the year at 4.6 percent.

"That, I think, is what may be really shocking. We would think that with the unemployment rate so low and the economy growing so vigorously that there wouldn't necessarily be any reason for the saving rate to be so low," Starr said.

This spending spree is broadly explained, she said, by the sharp rise in housing prices in recent years which has left many Americans feeling rich.

"With the housing market as strong as it's been ... people would feel wealthier and would feel less need to save out of their income," she explained.

Reinforcing the urge to splurge was the ease of borrowing, whether it is financed on home equity or simply rung up on credit cards.

"Even though the Fed (Federal Reserve) has been raising interest rates considerably, the cost of credit at the retail level is still not particularly high," Starr said.

For some experts, the personal savings shortfall portends a social security crisis as the first wave of baby boomers nears retirement.

The Commerce Department's report "is a wake-up call to start changing personal savings behaviour," said Marc Lackritz, co-chief executive of the Securities Industry and Financial Markets Association.

Lackritz pointed out that half of the 77 million baby boomers, Americans born between 1946 and 1964, will not have the means to support their current standard of living when they reach retirement due to a lack of savings.

The American dream could fade under the glare of overspending, MetLife, an insurance and financial services group, said.

"The announcement by the Commerce Department about the negative US savings rate, which is at its lowest level in 70 years, is a bellwether for the future of the American dream," it said.

"The lack of savings, combined with the seismic shifts that have occurred in our society in the last few decades with regard to pensions, social security and health care, are increasingly putting the dream out of reach for most Americans."

MetLife said a new study it had commissioned revealed that 60 percent of working Americans said they carried more financial burdens than their parents did.

Countering the alarm bells, American University's Starr pointed out the savings rate does not take into account household assets, such as home ownership, or pre-tax contributions to retirement savings accounts, known as 401(k).

"One would expect the increased home equity and the pre-tax saving into 401(k)'s to relax the need to save. But why it would cause it to turn negative is more of a puzzle," American University's Starr said. "It's really a question of magnitude." - AFP/de