Monday, January 30, 2006

More Reasons To Worry About The Economy

Yikes, don't you get scared when the year 1933 comes up in a story comparing today's personal savings rate to the past?

I know I do. Here's the story from the Associated Press:

WASHINGTON -- 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.


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.

Debt, debt, debt, debt, debt, debt...

And the bubble is bursting in the housing market with foreclosures up, interest rates are still rising, inflation is starting to rear its ugly head (core price index, which excludes volatile energy and food prices, was up 2.2% last quarter), wages remain stagnant, oil finished the trading day at $68.35 a barrel and it's been a mild winter so far, the trade deficit remains at record levels, personal household debt remains at record levels, bankruptcies were up sharply last year (though they probably was due to the new Bankruptcy Law), we're spending billions of dollars on a war in Iraq that was supposed to pay for itself and the first baby boomers will start retiring and drawing Social Security from a depleted system in just two years.

We're all in debt, debt, debt, debt, debt, debt, debt...

And now the government reports Americans had a negative savings rate last year for the first time since 1933.

So what happens if and when the economy tanks again and people have to draw on something?

They don't have any savings to fall back on. They can't borrow any more money because most people are in debt up to their hairlines. And housing prices are falling, not rising, so more equity tapping is out of the question too.

Not a good situation, is it?

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