johnnymk

U.S. Savings Lowest Since Great Depression

The United States' savings rate in June fell to the second-lowest monthly rate since the Great Depression.

A Commerce Department report showed that the savings rate was just 0.02%, which was surpassed only by the -0.2% rate in October 2001, when Americans responded to patriotic promotions from auto companies following the 9/11 terrorist attacks.

Economists attribute the low savings rate to a June spending spree that was sparked by rising home prices, deep discounts from auto companies and easy access to credit cards, the Los Angeles Times reports.

For the first six months of this year, the nation's savings rate averaged 0.4%, which means Americans spent 99.6% of their after-tax earnings.

Based on the June rate, Americans earn $9.055 trillion after taxes annually but save only $1.9 billion, according to the Commerce Department.

The low savings rate is worrisome for several reasons.

For one thing, it raises alarms about the Baby Boom generation - which is now in its prime savings years - and boomers' ability to prosper in their retirement.

Also, businesses rely on savings for the investments that help them grow, and the deficit-plagued federal government is soaking up a large portion of those investments through borrowing

Andrew Tilton, an economist at Goldman Sachs, said rising home prices have made homeowners feel wealthy and encouraged them to spend more while saving less - and in many cases, to fund their spending by refinancing

"People expect the housing market to keep rising," he said. "It won't."




Assuming the average household income is approximately $45,000, that calculates to an astounding $9.00. And people are expecting to retire? Better hope that Social Security will still be solvent and that their 401K plans bring real big bucks.

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Cubsfan

What's all added into this? If I put something into a 401k, does this count as 'savings'? Is it just savings accounts? CD's? Stocks? Under my matress?

johnnymk

I am guessing available cash...savings and checking accounts. But I could be wrong.

Merlin

This is pretty interesting. One would expect the crowding out effect to make it difficult for businesses to get money but right now we are so awash in liquidity that it is not a problem at all - rates are still low despite the government's prolific borrowing. This really appears to be an anomaly and I wounder how long it will persist.

Also to be considered....last time the government wasn't borrowing large quantities was the late '90's (that's right folks, it wasn't all that long ago that we were in surplus) and I believe that not having the government there to soak up a lot of money was part of what lead to the big stock market bubble.

In the long term we are all in quite a bind anyway. You can save all you want but the current fiscal policies are going to lead to much higher inflation at some point. You can't keep pumping liquidity like the fed has for a while now and not see inflation. And nothing kills savings better than inflation.

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Butch

This can be explained largely through one word - China.

China is flush with cash and the US offers many better investment options than China currently has, so they are more than happy to provide the cash to the US that the US is not able to provide through its own resources. We are becoming/have become tremendous debtors to China.

Typically, cash flows from developed countries to undeveloped countries. The US is royally screwing with that to help fund our consumption craze.

If China changes some of its policies, we could be pretty sh*t-up-a-creek in a hurry. For instance, if they were to institute further changes to their foreign exchange regime. Of course, while the Chinese pegged their currency to the dollar, there was no foreign exchange risk for the Chinese to invest in the US and provide us with the cash we crave. If the Chinese were to let the yuan float more broadly, dollar-based investments would likely look a lot less attractive to Chinese investors and our cheap supply of cash would dry up.

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DarkFury

Honestly, that wouldn't be a good indicator... since the many of us have "automatic savings" being taken out of pay before we even see it. Maybe ONE day all that money will come back to us... but for now, we can't touch it.

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zippyjuan

How is the personal saving rate measured?

The most frequently cited measure of the personal saving rate is based on the National Income and Product Accounts (NIPA). It is constructed by forming the ratio of Personal Saving to Disposable Personal Income (DPI), where DPI is defined as Personal Income (including wage and salary income, net proprietors' income, transfer payments less social insurance, income from interest and dividends, and net rental income) less tax and nontax payments to governments. Personal Saving is found by subtracting from DPI total Personal Outlays, 97% of which consists of Personal Consumption Expenditures (including consumer durables), with the remainder composed of Interest Paid by Persons (individuals, nonprofits, and trust funds) and Net Personal Transfer Payments to the Rest of the World. Given that personal saving is determined as a residual in the NIPA, measurement errors that appear anywhere in the computation of DPI or Personal Outlays will cumulate in personal saving.


From the Federal Reserve Bank of San Francisco.
http://www.frbsf.org/publications/ec...el2002-09.html

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VTGreg

Wow, so the average household spends all of their income, minus taxes, except for $9. That is pretty staggering.

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DarkFury

Pretty much, that's called "living hand to foot" or "paycheck to paycheck"