In 2005, the U.S. savings rate hit it's lowest level since 1933. Personal savings dropped to negative 0.5%, which means that Americans spent more than they made and dipped into their savings to make up the difference. The only other time the savings rate has been in negative numbers (according to the article published in 2006) was in 1932 and 1933 – prime years of the Great Depression. Analysts argue that a cause for the increased spending was consumers' confidence in the value of their homes.
I wonder how confident consumers are feeling about their homes in 2008?
9 comments:
When it comes to increased spending because of home values, I do not agree with the analysts. In my opinion, the increase in buying products has a lot to do with lifestyles. Consumers today are spending more because they want more. It seems like no one is ever satisfied with what they have. Consumers want things bigger and better no matter what the cost is. Despite the decline in the housing market, people are still spending rather than saving. The decline in the savings rate is greatly attributed to financial irresponsibility. I really think that the savings rate will begin to increase because the threat of a recession has been predicted by economists.
I agree that the increased spending was linked to home values. I owned my own business and we sold large ticket items. We opened for business in 2000 and our best years were 2004 and 2005. During that time over 65% of our business was financed through consumer financing plans that people planned to pay off with equity. Only about 5% of our business was cash. Towards the end of 2005 after Hurricane Katrina and the spike in oil prices the fed started raising interest rates and sales started declining rapidly. I talked to other business owners at conventions and trade shows and they had the same observations. People do want more but their ability to get it was tied to the equity in their homes. Hopefully people have learned a lesson and in the future use their equity as an investment, not as a tool to satisfy their immediate desires.
Oh woww - two really good information from two different sides. But I kind of agree a little bit more on emma. I mean I have lived in different countries, and economies over there can get really tough. However, even in bad economies, people still save a lot in those countries.
However, over here I have noticed that most people just want to keep pace with "Joneses" and don't really of what they can afford with (in their own means). I think this is the major reason of why the saving rate in US is very low.
I wouldn't worry too much about the savings rate. This is an input.
What's really critical to an economy is the rate at which it adds to its wealth. This is an output.
Focusing on the former is like buying a car that gets better gas mileage, and worrying about having to go to the gas station less often.
This is an issue because the U.S. economy is very good at creating wealth. In some sense, saving is stupider here than other places.
Yes, it might be prudent not to count on that.
Yes, it might be more noble to put off some purchases.
But ... we shouldn't worry about the savings rate until wealth stops going up.
Extra Credit - Dr. Tufte stated
"What's really critical to an economy is the rate at which it adds to its wealth. This is an output."
Consumers are financing wealth and the inevitable output will be negative, right? How do we measure an economy's wealth?
Dr. Tufte,
Don't you think though that with everyone spending so much and not saving money that over time our wealth will go down due to people being in such high debt. It seems to me that people are over consuming and not producing at the same level. Generation Y is known to spend 110% of what they make. I think that right now it may not show up, but I think it definitely will have an effect in the long run.
Extra Credit-Dr. Tufte stated that we shouldn't worry about the savings rate until wealth stops going up. My question is if it's possible to keep the economy growing by spending money but also save money at the same time. Wouldn't this strengthen the economy more because of increased buying power in less prosperous times? I took from your comment that it's a noble idea to save but we shouldn't do it until wealth starts to decrease. That might be alright for a corporate financial policy buy not very prudent for individuals in my opinion.
Dr. Tufte
I just want to know if you actually think about life in economic principles and terms as you illustrated in the comment. If so, is that healthy? Noble status has no bearing here; controlling yourself and maintaining prudent financials is an important part of self-discipline. We would not be seeing the debt spectacular that is ravaging the world if more people spent less and saved more. Planned spending makes so much sense it hurts!
I'm not sure I understand Gavin's point.
My point is that wealth is primary, and saving is secondary: you save to create wealth.
So ... what should you do if wealth falls into your lap? The answer is save less. And America has been fantastic at increasing the wealth in the typical families hands.
William: I think this is the story we are being sold. It is correct, unless wealth is increasing for reasons other than savings. That seems to be the case.
Reagan: I think you've bought into an argument on moral rather than economic grounds. Saving isn't good in and of itself. It is good as a means to an end, and that end is wealth. If you have wealth, I see little reason to save.
theFindlay: I am all for planning and self-discipline, but they are secondary. You don't plan things that don't need to be planned, and you don't engage in self-discipline just for the fun of it unless you're an automasochist. These are means not ends, and in this country we are way too focused on judging people by the means they take rather than the ends they have. This is Puritan, nothing more, nothing less.
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