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Savings rate falls to lowest since '33

The gauge dips to negative 1% for 2006. Americans still spend more than they make.

February 02, 2007|From Associated Press

WASHINGTON — Americans again spent everything they made and then some last year, pushing the personal savings rate to the lowest level since the Great Depression more than seven decades ago.

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

For December, consumer spending rose 0.7%, the best showing in five months; incomes rose 0.5%. Both figures matched Wall Street expectations.

In other news, an inflation gauge tied to consumer spending that is followed by the Federal Reserve edged up 0.1% in December. This indicator, which excludes volatile food and energy prices, was up 2.2% over the 12 months ending in December, still outside the Fed's comfort zone of 1% to 2%.

A key gauge of factory activity flashed recession warnings in manufacturing in January. The Institute for Supply Management said its manufacturing index registered 49.3 last month, down from a December reading of 51.4. A reading below 50 indicates that activity is contracting.

The Labor Department reported that the number of newly laid off workers filing claims for unemployment benefits dropped 20,000 last week to 307,000. That improvement pushed the four-week average for claims to the lowest level in a year, indicating that the labor market remains healthy.

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

During the Great Depression, when one-fourth of the labor force was jobless, people dipped into savings in an effort to meet their basic necessities of shelter and clothing.

Economists have offered various reasons to explain the current lack of savings. These range from some people's view that they have no need to save because of gains in their real estate or stock holdings to the many middle-class wage earners' desire to maintain their current lifestyles even though their wages have been depressed by global competition.

The savings rate is computed by taking the amount of personal income left after taxes are paid, which is known as disposable income, and subtracting the amount of spending. With the figure dipping into negative territory, consumers are apparently spending all of their disposable income and then some.

In December, the savings rate edged down to negative 1.2% from negative 1% in November. The savings rate has been in negative territory for 21 consecutive months.

Consumer spending rebounded in the final three months of 2006, helping lift economic growth to a rate of 3.5% for the quarter. That easily surpassed the lackluster growth in the spring and fall.

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