A hazard of boom times: forgetting to save

For the first time, American households owe more than their annual disposable income.

Americans have a big hole in their pockets. They are spending more than they earn in salaries and wages. Even with their investment returns factored in, they're saving almost nothing.

But, hey, many - especially the older folk - are rich.

Americans, mostly the well-to-do and senior, have sold more than $2 trillion in individually held stocks since 1994, taking advantage of high prices.

Moreover, their 401(k) or 403(b) pension plans are stuffed with stocks. Stock prices have been up an average 20 percent a year for five years. Why should they not be a little lavish - a new car, a remodeled fancy kitchen, a Caribbean trip.

"These people are spending like it is going out of style," says David Wyss, chief economist of Standard & Poor's DRI, a consulting firm in Lexington, Mass.

Stock-driven prosperity explains to a large extent why personal savings as a proportion of disposable income (after-tax income) has fallen to 0.2 percent in the first half of this year.

That savings ratio was 8.7 percent in 1992. It has fallen every year since then.

But what happens if the stock market stagnates - as it has since March? Or if it tanks?

The size of those 401(k) checks to retirees from Fidelity and other fund-management firms is set by regulation as a percentage of the assets in the plan. Instead of growing each year, those checks will remain the same or shrink.

The question among some economists is whether consumers of all ages will restrain their spending to get it in closer balance with earnings. Salaries and wages grew at a rate of 6.8 percent in the first half of 2000.

Consumer spending grew at a brisk 7.6 percent annual growth rate in the January-March quarter. It has already slowed to a modest 3 percent rate in the April-June quarter.

Mr. Wyss doesn't believe such restraint will cause a recession. But the efforts of consumers to replenish their savings and pay off debts could make it harder to move out of any slump.

"[Federal Reserve] Chairman [Alan] Greenspan may earn his reputation in the next six months," says Charles McMillion, an economist with MBG Information Services in Washington. "This is something to watch very closely."

"The upward scope for economic growth is quite limited," says John Lanski, chief economist of Moody's Investors Service, in New York.

The statistics probably exaggerate the decline in savings a bit. Taxes on capital gains are subtracted like income taxes and other taxes from personal income to get disposable personal income. But capital gains themselves, hard to measure, aren't added to personal income.

Nonetheless, Wyss sees high levels of personal and corporate debt as a "growing worry."

For the first time in US history, American households owe more than their annual disposable income, notes Wyss. Such debts are manageable "as long as the economy continues to grow." Bankruptcies and credit-card defaults are down from record levels in 1997. Mortgage defaults remain "very low" in today's strong housing market.

On the other side, the wealth of Americans has moved out of its historical range of 4 to 5 times income to 6 times income.

But what happens if the economy moves into a recession and interest rates rise? Wyss asks. A growing number of households are already overextended. There could be considerable distress.

As a nation, the drop in personal savings has been largely offset by the growing budget surplus in Washington. The Treasury paid down $20 billion of Uncle Sam's debt in the first quarter, $192 billion in the second quarter, and there is more to go this year.

Corporations piled up retained earnings (not paid out in dividends) at a $247 billion annual rate in the first quarter.

Massive inflows of foreign investment money has helped maintain a domestic investment boom, overcoming the US savings gap.

Foreigners already own almost $7 trillion in American assets, says Jane D'Arista, an economist at Financial Markets Center in Philomont, Va. She suspects a domestic economic dip could be intensified if foreigners decide not to cover that savings deficit by investing further in the US - or start to take money out.

Foreigners own about $1.7 trillion of US Treasuries and agency debt, $800 billion of corporate bonds, $1.2 billion in stocks, and $200 billion in loans.

Large sales could be trouble.

(c) Copyright 2000. The Christian Science Publishing Society

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