Americans Spending Big, Keeping Little : Economy: Weakest savings rate in four years shows that only 3.7% of disposable income was put into banks in October.
When he was hired as a pilot by Delta Air Lines Inc. early this year, Dave Finer thought he could save about 15% of his take-home pay. That’s 5% for his new son’s college fund, 5% for retirement and 5% for a new house.
Finer hasn’t squirreled away a penny. Laid off from Delta in June, he now earns a fraction of his former $30,000 pilot salary--as a photographic assistant at Auto Trader magazine. And though his wife has returned to work as a part-time nurse, the 29-year-old decorated Gulf War veteran said times are too hard to save money. “I have too many bills to pay,” he said.
Like Finer, Americans aren’t saving much these days. Even though the U.S. economy is in a robust recovery, unemployment lines still swell and layoffs at big companies are an endemic problem. In addition, wages are flat year to year. At the same time, spending is up: In October, consumer spending rose 0.8%, the largest gain in six months.
Where’s the money coming from? Savings, economists conclude.
This isn’t just an idle guess. According to the U.S. Commerce Department’s yardstick for the savings rate--defined as income minus spending--Americans in October put away only 3.7% of their disposable income, or less than 4 cents of every dollar earned after taxes. That’s the weakest savings rate in four years and a dip from 1992’s 5.3% savings rate.
To some economists, the big spender, small saver scenario is a ticking time bomb that threatens the economic recovery. “Consumer spending simply is rising faster than consumer income,” said Donald Straszheim, chief economist at Merrill Lynch, who predicts the economy will grow only 3% next year compared to a 4.5% annualized rate in the fourth quarter. “That happens now and then, but it can’t last forever.”
Eugene Sherman, research director at M.A. Schapiro & Co., a New York investment banking firm, agrees. “In the long run, a low saving rate derails economic activity,” he said.
Still, there’s something different about this savings trough, other economists say, which makes it less ominous. A lot of cash once earmarked for savings accounts has fled to the stock market in search of better returns.
For the first time ever, the amount invested in mutual funds--nearly $2 trillion--equals bank deposits. And with the Standard & Poor’s 500 Index up 19% in the past 20 months and 70% since 1988, people investing in the markets now are getting a lot more money from their savings.
Now that they’re accustomed to these returns, people are less fearful about spending more and saving less. “In reality, the importance of the decline in the savings rate is overstated,” said James Solloway, research director at Argus Research.
The spending spree is taking a particularly large chunk out of savings because consumers are mostly looking for expensive items like homes, cars and furniture.
“People are buying the big-ticket goods they feel they have to have now,” said Irwin Kellner, chief economist at Chemical Banking Corp.
Take homes, for instance. The average rate on a 30-year fixed mortgage in October was 6.4%, the lowest in 25 years; meanwhile the median price for a new home declined 5.5% to $121,000 from last year. No wonder that Sales of new single-family homes hit a four-year high in September.
Similarly, U.S. auto sales declined one-tenth of 1% in November but surged 5% in October, the largest gain in more than two years. Furniture store sales in November climbed 3.7%, the biggest increase in 10 years.
