Americans’ savings rate drops to Depression era-low

WASHINGTON - Americans spent more than they earned last year as the economy steamed ahead, pushing the personal savings rate to negative 1.0 percent, the deepest hole since the Great Depression of the 1930s.

By (AFP)

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Published: Sun 4 Feb 2007, 5:03 PM

Last updated: Sat 4 Apr 2015, 9:48 PM

The figure, published last week by the US Commerce Department, means that not only did Americans spend all their income, they dug into savings and used credit to buy more.

Over the past seven decades, the personal savings rate -- the difference between post-tax, or disposable, income and spending -- has been in negative territory only four times: 1932, 1933, 2005 and 2006.

In the 1930s, the Great Depression explains why Americans had to dip into their savings at a time when a fourth of the workforce was out of a job.

But in 2006 and in 2005, when the personal savings rate slipped to negative 0.4 percent, the economic situation was far different, which bothers economists.

‘It’s surprising, especially in a period with the economy growing so strongly,’ said Martha Starr, an economics professor specialized in savings and consumption issues at American University in Washington.

The US economy grew by a robust 3.4 percent in 2006 -- consumer spending accounts for about two-thirds of US economic output -- and the unemployment rate ended the year at 4.6 percent.

‘That, I think, is what may be really shocking. We would think that with the unemployment rate so low and the economy growing so vigorously that there wouldn’t necessarily be any reason for the saving rate to be so low,’ Starr said.

This spending spree is broadly explained, she said, by the sharp rise in housing prices in recent years which has left many Americans feeling rich.

‘With the housing market as strong as it’s been ... people would feel wealthier and would feel less need to save out of their income,’ she explained.

Reinforcing the urge to splurge was the ease of borrowing, whether it is financed on home equity or simply rung up on credit cards.

‘Even though the Fed (Federal Reserve) has been raising interest rates considerably, the cost of credit at the retail level is still not particularly high,’ Starr said.

For some experts, the personal savings shortfall portends a social security crisis as the first wave of baby boomers nears retirement.

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