Personal Savings Rate in Red, 1st Time Since ‘30s

For the first time since the Great Depression, Americans spent more money in a single month than they earned, driving the personal savings rate into the negative zone, the Commerce Department reported Monday.

But unlike the 1930s, when hard times put savings out of reach for many Americans, the new outbreak of consumer mania reflects an ebullient stock market that has made people feel wealthier and more willing to spend.

Americans spent $100.20 for every $100 in after-tax earnings in September. The negative savings rate--the first in 65 years--of 0.2% speaks volumes about the U.S. economy in the 1990s.

Thanks to the stock market, consumers have played a pivotal--if increasingly precarious--role in preserving the economic expansion that is now in its ninth year despite economic shock waves from overseas. Although consumer confidence has fallen each month since June, many Americans remain optimistic enough to spend all their wages--and then some.

“What it says basically is that Americans love spending money--whether they have it or not,” said David A. Wyss, chief economist with Standard & Poor’s DRI. “People have just felt pretty comfortable in living beyond their means.”

Wyss might have had Chris Durant in mind. The 43-year-old computer programmer from Van Nuys, having just shelled out $170 at the Gap in the Media City Center Mall in Burbank for a batch of sweaters he plans to give as Christmas presents, paused long enough to explain why he keeps spending more than he earns.

“It’s an addiction,” Durant said. “I just can’t stop. If all the consumers keep getting more and more into debt and keep spending, nothing bad is going to happen [to the economy]. So I’m doing my part.”

The savings rate, which is computed from Commerce Department data on how much Americans earn and spend each month, has ranged between 5% and 10% of after-tax income for most of the post-World War II period. It slipped below 4% in 1997 and has fallen sharply since then.

The statistic obscures enormous differences among households, many of which have enjoyed no Wall Street windfall and are struggling under the weight of growing debt.

“There’s a nasty feeling that the debt is distributed more evenly than the wealth,” Wyss said. “It’s not people with the multimillion-dollar stock portfolios that have the debts on their credit cards.”

‘Every Day Is Christmas’

At the Burbank mall, some of those who talked to a reporter said they were always careful to live within their means.

Doug Hanson, a 49-year-old Bank of America employee who was at a Barnes & Noble bookstore “hoping to add to my pile of unread books,” said his six-figure stock portfolio was up 13% this year despite the market’s recent roller-coaster ride.

“Every day is Christmas . . . “ the Hollywood resident said. “I’m very happy, very optimistic.”

But then there was another cheerful consumer who hopped behind the wheel of a Jeep Grand Cherokee clutching two shopping bags from Ikea. Without giving her name, she said: “My husband and I live beyond our means all the time.”

Mary Lou Kuss of North Dakota, visiting her daughter and looking for a jigsaw puzzle for a nephew’s birthday, said she and her husband felt comfortable spending more than their combined monthly income because each had more than 20 years with their present employers. She said she and her husband occasionally dip into their savings to pay off monthly credit card bills.

“My husband and I are pretty stable,” said Kuss, 47, a clerk at an elementary school cafeteria. “We don’t worry too much.”

The term “savings rate” is something of a misnomer because it is not a measure of savings, but rather of the difference between Americans’ after-tax income and their spending. When spending exceeds income, Americans are presumed to have dipped into savings.

Contributions to retirement plans, reinvestment of dividends, parts of mortgage payments and other items are counted as savings for the simple reason that they are not deemed to be expenditures.

Some Windfalls Not Counted as Income

Windfalls to consumers from the sale of such assets as stocks and homes are not counted as income in the Commerce Department tabulations of the savings rate. So when consumers spend such money, inflated nowadays by the long-running bull market, it appears as if they are dipping into savings.

Further complicating the matter, the department recently revamped its income measure to exclude certain types of mutual fund distributions that were previously counted as income. That has made the savings rate appear even smaller.

“The number may be misunderstood at times, but it tells us something very important about the state of the economy,” said Larry Moran, a spokesman for the Commerce Department.

The current state of the economy, judged from the latest indicators, is decidedly mixed.

The National Assn. of Purchasing Managers said Monday that factory output fell in October for the fifth straight month. Its index of industrial activity fell to 48.3 from 49.4 in September. A reading above 50 in the index suggests an expanding manufacturing sector, and one below that indicates contraction.

And consumers have told pollsters that they feel increasingly concerned about the economic outlook for six months in the future, even as their description of “current conditions” has remained markedly higher.

Few analysts believe consumer spending can exceed income for a sustained period, particularly at a time when household debt levels have reached all-time highs.

Consumer spending, the economy’s key engine, rose 3.9% during July through September compared with the previous three months. But the new figures suggest that the engine could be running on a limited amount of fuel.

“The fact that consumers are spending is a positive for the economy, but the fact that the savings rate is so low is a negative,” said Wyss. “People can’t continue spending at this level.”

Many economists had expected the baby boom generation to drive the nation’s personal savings rate up as it reached the age--the late 40s and the 50s--at which Americans have typically switched from spenders to savers. “That forecast was one of the worst Wall Street has ever seen,” said Robert A. Brusca, chief economist with Nikko Securities in New York. “And the reason it hasn’t happened is that the stock market has gone up beyond people’s wildest dreams.”

Even before the savings rate turned negative, Americans had long saved much less of their incomes than have other industrial countries, particularly Japan. And for years, economists have warned that the consequence would be a shortage of investment capital in the United States.

That hasn’t happened yet. And now, for the first time in three decades, the federal government has become a net saver, offsetting the drain exerted by consumers on the pool of savings available for investment.

The budget surplus, $70 billion in the fiscal year that ended on Sept. 30, is projected to soar into the hundreds of billions of dollars in coming years.

Staff writer Peterson reported from Washington and special correspondent Gregory from Los Angeles.

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Negative Savings

Americans spent 0.2% more than they earned in September, the Commerce Department reported.

Sept. ‘98: -0.2%

Source: Commerce Department