Stephen Speicher

Negative savings rate -- How is economy sustained?

12 posts in this topic

From CNN.com.

Personal savings rate drops to lowest in 74 years

POSTED: 12:20 p.m. EST, February 1, 2007

WASHINGTON (AP) -- Americans once again spent everything they made and then some last year, pushing the personal savings rate to the lowest level since the Great Depression.

The Commerce Department reported Thursday that the savings rate for all of 2006 was a negative 1 percent, meaning that not only did people spend all the money they earned, but they also dipped into savings or increased borrowing to finance purchases. The 2006 figure was lower than a negative 0.4 percent in 2005, and was the poorest showing since a negative 1.5 percent savings rate in 1933 during the Depression.

For December, consumer spending rose a solid 0.7 percent, the best showing in five months, while incomes rose by 0.5 percent, both figures matching Wall Street expectations.

[...]

The savings rate has been negative for an entire year only four times in history -- in 2005 and 2006 and in 1933 and 1932. However, the reasons for the decline in the savings rate were vastly different during the two periods.

During the Great Depression, when one-fourth of the labor force was without a job, people dipped into savings in an effort to meet the basic necessities of shelter and clothing.

Economists have put forward various reasons to explain the current lack of savings. These range from a feeling on the part of some people that they do not need to save because of the run-up in their investments such as homes and stock portfolios to an effort by many middle-class wage earners to maintain their current lifestyles even though their wage gains have been depressed by the effects of global competition.

Negative savings? In 2005 and 2006? I don't understand this. Aren't savings the basis on which banks finance? How do we have continued growth in the economy -- new business and continuing expansion of old -- without a sustaining base in savings?

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From CNN.com.

Negative savings? In 2005 and 2006? I don't understand this. Aren't savings the basis on which banks finance? How do we have continued growth in the economy -- new business and continuing expansion of old -- without a sustaining base in savings?

The answer is that consumer savings is only one source of capital. The other is cash retained by corporations, which has been growing. Here is a June 2005 paper by JP Morgan entitled "Corporates are driving the global savings glut" that has a variety of statistics showing the rise in "corporate saving".

The other source of capital for investment in the U.S. economy is foreign investment. Positive net foreign investment in the U.S. is the flip side of the "trade deficit" that news outlets such as CNN are constantly carping about.

So, there may be a draw from savings by individuals, but this is more than made up for by corporate retained earnings and foreign investment.

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I'm not claiming to know more than a smidge about economics, but isn't a possible answer given in the article's last paragraph? If the value of real estate holdings and investments are not included in the "personal savings rate" statistic, this statistic would appear to be meaningless. Being a government statistic, this would not really surprise me.

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I'm not claiming to know more than a smidge about economics, but isn't a possible answer given in the article's last paragraph? If the value of real estate holdings and investments are not included in the "personal savings rate" statistic, this statistic would appear to be meaningless. Being a government statistic, this would not really surprise me.

I admit to probably knowing even less about this than you; I assumed that money I invested in stocks, mutual funds, or bonds only differed from "savings" by the rate of return in a bank account. If "savings" means only money put in a bank account then I too do not know what to make of this statistic.

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I'm not claiming to know more than a smidge about economics, but isn't a possible answer given in the article's last paragraph? If the value of real estate holdings and investments are not included in the "personal savings rate" statistic, this statistic would appear to be meaningless. Being a government statistic, this would not really surprise me.

It is the growth in value of homes that has enabled individuals to have a negative savings rate. What matters to any individual is their total wealth. That consists of cash in savings accounts and real property such as homes. Because homes (until recently) have been rising in value, individuals discover that they can stop saving or even spend their savings, and still experience a rise in total wealth.

One could look at the growth in value of their homes as a form of involuntary savings. I suspect that if home prices continue their recent decline in value, individuals will step up their cash savings rate.

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From the Dept of Commerce new release itself:

Saving from current income may be near zero or negative when outlays are financed by borrowing (including borrowing financed through credit cards or home equity loans), by selling investments or other assets, or by using savings from previous periods.

And so, apparently the personal savings rate is only based on current earnings, and does not include accruals of investments and real estate. So a robust economy with low inflation, in which investment gains are sufficient for consumers to borrow against them, or use them outright, in anticipation of short term recovery in those assets, can be a cause for this rather fictitious statistic to go and stay negative, and yet not be a meaningful warning sign.

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Yes, this particular statistic does not take asset-growth into account. So, $100 saved in a bank account is $100 saved and $100 invested in stocks is still $100 saved. If, say, 10 years later the $100 has grown to $200, then -- according to the (National Income and Product Account) NIPA stats, no additional saving has taken place.

This leads to the following paradox: Someone earns (say) $2 million over his lifetime and consumes some of it and saves some. Let's assume that $500K of this goes toward a house, $400K into investments. Assume that his investments are $1 million at the time of retirement and he spends $900K of that up to the time he dies. So, he leaves a house and $100K in stocks. Did this person save anything over his lifetime? According to NIPA stats, he did not because he saved $500K before retiring and spent $900K after he retired. In nominal (i.e. not inflation-adjusted) terms this person spent more than he earned, so he ended up net -$400K even though he left a house and $100K to his heirs.

The paradox can be seen by looking at the "Household Net Worth" figures. According to NIPA, people are saving less every year. Yet, Net Household Wealth continues to rise. (These details come from the government's Flow of Funds Account (FFA).)

This paper gives a good summary of some of the issues.

In spite of these issues, it is possible that the average person is saving less in this decade than in past ones.

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This leads to the following paradox: ...

Okay, that does seem rather strange. But, I'm still back at the beginning: what exactly does count as "savings" according to this statistic?

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In essence, what they are trying to measure is the difference between personal income and personal consumption ("personal" as opposed to "business").

Along with wages, interest and dividends are counted as income. The paradox I mentioned comes about because capital gains are not counted as income. A retired person drawing on his pension fund or assets is not considered to be getting income from those sources, because the NIPA accounts already counted that money (at original value) when it went into the pension fund or retirement account.

(Here's an article that contains some info.)

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(Here's an article that contains some info.)

Okay. This part of the article makes sense to me:

As it is currently stated, NIPA's definition of personal saving is simply the difference between personal disposable income and personal spending.

I think perhaps it was Greenspan who referred to this as something like "deferrable consumption" in one of his courses years ago.

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The "national savings rate" doesn't make much sense as a statistical indicator of anything. If I "save" unspent wages and get 2% in a bank account, that's better than investing the money in stocks and making 10%? Like the trade deficit and many other government figures, it's pretty useless as a measure of anything.

Now what would be interesting would be tracking a national median net worth that includes everything (including investments and home appreciation and reduction of personal debt and so forth), then look at such figures historically in real and nominal dollar terms. Is the average citizen today better off than he was 5 years ago? Or compared to his parents?

I wonder about that sometimes. Most of my friends grew up in single-income, two-kid households, and weren't up to their eyes in debt. Today, at least in Southern California, it takes two incomes to get by. Anecdotally, I'd say people are not as well off. But is it true? And people today have bigger homes than 30 years ago. Certainly some expenses (taxes, medical care, college) have grown ahead of inflation, in terms of the total percentage of spending. Other things have dropped in price, and new technology (PCs, internet) are available today that weren't back then. It would require a close look to know for sure. But again, this "savings rate" is a bad yardstick for such things; a figure based on net worth would be better.

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Most of my friends grew up in single-income, two-kid households, and weren't up to their eyes in debt. Today, at least in Southern California, it takes two incomes to get by. Anecdotally, I'd say people are not as well off. But is it true?
This Forbes article might give you some insight.

In essence, the article says that while "Mr. and Mrs. Median" earn more than their parents (after adjusting for inflation), a majority of them think their parents lived better.

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