Americans Find Balance Between Saving and Spending
Baby boomers' changing investment practices indicate that US economy is in good shape for the long haul
THE American economy is at a turning point, on its way to reclaiming its historical role as the most efficient industrial machine in the world. This is occurring despite short-term consumer pessimism about the economy, smaller savings by Americans compared to other nations, and slow growth in gross domestic product (GDP) over the past three years. But if we focus on historical trends and current economic indicators, including a new national survey of investor expectations, a different picture emerges.
For years, economists have argued that Americans' low rate of savings - currently about 3 percent of income - has retarded the pace of investment and growth. But to a large degree, the nation's comparatively low savings rate has simply reflected the lifestyle of the ``baby boom'' generation, the 80 million Americans born between 1946 and 1964.
Since the mid-1960s the baby boomers have been consummate consumers, buying record amounts of housing, automobiles, and recreation and consumer goods. Rising costs that are associated with raising a family, coupled with high inflation rates in the 1970s and '80s, also made saving difficult.
But now baby boomers are becoming part of the solution. Changing investment behavior by the baby boom generation is bringing about a major increase in total national savings. Many boomers now have more disposable income because their children are leaving home. Also, they are keenly aware that retirement is just ahead, and they are increasing their savings and investment accordingly. Just look at mutual fund growth, where the average investor is 45 years old.
Last year, mutual fund sales totaled $352 billion, a 54 percent jump from the previous year. That baby boomers view mutual funds as the most promising long-term investments helps to explain the record flow of savings into the stock and bond markets since the beginning of the 1990s. Today, the mutual fund industry is a $1.9 trillion business.
Americans' growing propensity to invest is reflected in a new national monthly poll, the American Capital Index, sponsored by American Capital Management and Research. The index, which is based on a random sample of 1,000 households and measures the public's investment and savings intentions and its perceptions of the economic climate, has risen 141 points in the past 90 days.
This behavior seems to signal improvement in the general public outlook about the future course of the economy. The poll also showed that Americans are choosing a wide variety of investment options: 75 percent have savings accounts; 24 percent own real estate other than their primary residences; 31 percent report they own stocks, and 27 percent own bonds. A surprisingly large 29 percent have invested in mutual funds.
The current vogue for corporate down-sizing, which has resulted in more than 500,000 layoffs by Fortune 500 companies in the last two years, also has a bright side. Cost-cutting is leading to higher profitability and improved balance sheets, both prerequisites for a future surge of investment spending and hiring. And corporate restructuring is having an extremely positive effect on the nation's productivity, which ultimately determines the rate of real economic growth.
Another sign of the times is the increase of temporary and contract workers in the work force. While contracting-out and self-employment may limit personal income gains in the short run, the nation's improved competitive posture will boost job opportunities and real income over the long term.
Rising productivity is already benefiting consumers and businesses by dampening inflationary pressures, keeping down interest rates, and spurring long-term investment. The North American Free Trade Agreement will further improve investment opportunities.
These structural changes stem from a technological revolution that eventually will create more jobs than it destroys. While some jobs, and even job categories, are becoming obsolete, many others are being created, particularly by small- and medium-sized businesses. Over the past year employment has risen sharply in health care, computer services, business consulting, education, and recreation. There have been sizable gains in professional, managerial, service, and sales jobs.
The renewed strength of the American economy is often overlooked when we focus too much on short-term statistics and not enough on the tide of unfolding events. America is changing from a nation of consumers to a nation of investors, a shift that will fuel rapid economic growth for decades to come. The Opinion/Essay Page welcomes manuscripts. Authors of articles we accept will be notified by telephone. Authors of articles not accepted will be notified by postcard. Send manuscripts to Opinions/Essays, One Norway Street, Boston, MA 02115, by fax to 617 -450-2317, or by Internet E-mail to OPED@RACHEL.CSPS.COM.