Savings Boom, but Exactly How Seems a Mystery
Yes, Americans are investing record sums in stock mutual funds. We all know that by now. But stock funds are just one piece of the savings and investment pie. The bigger surprise of the last few months has been how the pie overall has grown. People are somehow finding the money to buy all sorts of financial assets.
Could the “savings decade”--what the 1990s were supposed to be--finally have begun?
Consider: In addition to the record $28.9-billion net new investment in stock funds in January, Americans invested a net $4.4 billion in fresh cash in bond mutual funds, the most in two years. At the same time, money market mutual funds picked up $23.9 billion in new money in January.
Maybe people cashed out of their bank accounts to buy mutual funds? Some may have, but not many. Federal Reserve Board data show that the total in small certificates of deposit nationwide has been holding steady around $934 billion this year. Meanwhile, savings account balances (such as in passbooks) have actually risen $31.2 billion since year’s end and $47.2 billion since November.
These are a lot of big numbers. The January stock fund inflow alone was more than $100 for every American. And what’s troubling some economists is that they can’t explain where, suddenly, all of this cash is coming from.
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The easy explanation is that aging baby boomers are simply spending less on material things in order to boost their savings for retirement and for kids’ college expenses. The Christmas shopping season was dismal, of course. Retail sales overall grew 4.9% last year, weakest since 1991.
Moreover, home sales last year never regained the levels that many economists had expected, given the continuing slide in mortgage rates. Sales of existing homes have been falling since September, even adjusted for seasonal trends and even though mortgage rates have tumbled.
“I think there is a massive amount of money that in years past would have gone into real estate and now is going into financial assets,” says Susan Sterne, economist at Economic Analysis Associates in Greenwich, Conn. Instead of trading up to a bigger house, many Americans are opting to buy stocks or boost savings accounts, she says.
Still, Sterne admits, “something is missing” in the typical explanations for the savings and investing boom of recent months. Much of the cash that went into stock funds in particular “should have come from somewhere else,” she says.
Some economists suggest that more workers than usual got bonuses from employers in January--perhaps the first strong sign that hefty corporate profits are being shared. On the flip side, a surge in layoffs in January might have left the victims with big pension distributions to invest.
The mutual fund buying explosion can also be explained partly by small investors’ ongoing ownership shift from individual stocks to the funds, an asset “swap,” as it were.
Tongue only slightly in cheek, some economists also surmise that cash has recently been pulled from mattresses or is finding its way into stocks from the uncounted “underground” economy.
More worrisome is the suggestion that some Americans are boosting their savings rates with--of all things--borrowed money.
“Margin debt,” the sum officially borrowed by individuals for securities purchases, doesn’t show that. It has been falling in recent months, according to New York Stock Exchange data. Margin debt was $73.5 billion at Jan. 31, down from a peak of $77.9 billion in November.
Yet consumer borrowing overall, via installment loans, credit cards and home equity lines, continued to rise at a brisk, albeit slowing, pace in 1995. So much so that many families are reaching the upper limits of reasonable debt burdens.
Are people using some of that money to invest? “I don’t presume that it’s quite that conscious a decision,” says economist David Munro at High Frequency Economics in New York. But consider this scenario, he says: Seeing the need to raise their savings rate, John and Jane Doe boost the percentage of their pay contributed to their 401(k) retirement savings plans. But that means a pay cut. After a few months, they find themselves using their credit cards more to support their lifestyle.
Nobody knows how much of that is going on, but it’s fair to say that the 1990s so far have been as much a “debt decade” as a “savings decade” for plenty of Americans. The real test of peoples’ desire to save will come when additional credit is either unattainable or unpalatable. Are we really willing to sacrifice more of the present good life to sock away more for the future?
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The Rising Tide
The big story of the past few months has been the surge in stock mutual fund purchases. But in fact, Americans have been saving and investing more in other financial assets as well--fueling a rising tide of saving that has surprised many experts.
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Assets in billions Pct. Nov. 30 Latest change Stock funds $1,243.5 $1,332.3 +7.1% Savings accounts 1,116.5 1,163.7 +4.2% Small CDs 930.4 934.1 +0.4% Bond funds 789.4 811.1 +2.7% Money market funds 750.2 808.1 +7.7% Large CDs 415.5 428.1 +3.0%
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Stock and bond fund assets as of Jan. 31; CD and savings account assets as of Feb. 12; money maket fund assets as of Thursday.
Source: Investment Co. Institute; Federal Reserve Bank of St. Louis
