US savings picture brightens a little

Americans didn't spend more than they made last year, newly revised figures show, but debt remains a problem for many.

from the August 2, 2007 edition

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"The overall stress on consumer spending is not nearly as severe as the previous data indicated," economist Charles McMillion of MBG Information Services writes in a commentary on the data. Still, that stress remains significant, he says.

Rising costs for things like healthcare and energy are devouring pay hikes for many workers. Mortgage payments are resetting upward for many people with adjustable-rate loans. And in recent years, easy lending conditions have prodded people to bid up home prices – sometimes because families are stretching to live in better school districts for their kids.

These conditions help explain why the savings rate, even now, is historically low.

"It's still really the lowest it's been since the early 1930s," Mr. McMillion says in an interview. "The average person is having to borrow just to get by."

In the new Commerce Department figures, personal income for the nation was revised up by 0.6 percent ($62 billion) for 2005 and by 0.8 percent ($92 billion) for 2006. That helped push the personal savings rate to a positive 0.5 percent of disposable income for 2005 (versus a previously reported minus 0.4 percent), and a positive 0.4 percent for 2006 (versus minus 1 percent before).

But the savings rate remains far below historic norms, and below rates in other advanced economies .

Also troubling, McMillion says, is that much of the upward revision in personal income stemmed from greater interest and dividend income, not wages. That suggests that the savings picture has improved mainly for the best-off Americans, those with substantial financial assets.

"It's amazing how highly leveraged middle-class and upper middle-class households have become," he says. Many lower-income households live with no savings to cushion them from bankruptcy.

It is unclear whether other nations, such as China, will continue to be net lenders to the US. Some economists say such lending has helped to keep American interest rates low.

"The US is going to become an even bigger exporter than it is today," Kasriel predicts. "We owe the rest of the world a lot, and they're going to start collecting."

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