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Savings rate lowest since great depression

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   http://www.breitbart.com/news/2006/01/30/D8FF6D700.html

http://www.breitbart.com/news/2006/01/30/D8FF6D700.html

Savings Rate Lowest Since Great Depression
Jan 30 2:18 PM US/Eastern

By MARTIN CRUTSINGER
AP Economics Writer

WASHINGTON

Americans are spending everything they're making and more, pushing the national savings rate to the lowest point since the Great Depression.

Soaring home prices apparently have convinced people they don't have to worry about saving, a belief that could be seriously tested as 78 million baby boomers begin to retire.

The Commerce Department reported Monday that Americans' personal savings fell into negative territory at minus 0.5 percent last year. That means that people not only spent all of their after-tax income last year but had to dip into previous savings or increase their borrowing.

The savings rate has been negative for an entire year only twice before _ in 1932 and 1933 _ two years when Americans were having to deplete savings to cope with the massive job layoffs and business failures caused by the Great Depression.

This time the reasons for the negative savings rate are vastly different. Americans are spending all their incomes and then some because they feel wealthier because of soaring value of their homes, which for many Americans is the largest investment they own.

But analysts cautioned that this behavior was risky at a time when 78 million Americans are on the verge of retirement. The baby boomers start turning 60 this year, which means they can begin retiring with Social Security in just two more years.

Analysts said with this huge wave of pending retirements, the savings rate should be going up rather than being on a steady decline over the past two decades. The savings rate stood at 10.8 percent of after-tax incomes in 1984 and has been declining steadily since that time. It was down to 1.8 percent in 2004 before turning negative last year.

"Americans seem to have the feeling that it is wimpish to save," said David Wyss, chief economist at Standard & Poor's in New York. "The idea is to put away money for old age and we are just not doing that."

Analysts said that not only rising home prices but a rebound in stock prices following the 2000 market collapse have many Americans feeling more wealthy, and that wealth effect is a major pillar supporting consumer spending.

"Americans have been content to spend a lot more than is good for them or for the economy," said Lyle Gramley, senior economic adviser at Schwab Washington Research Group.

After setting records for five straight years, sales of both existing and new homes are expected to decline this year under the impact of rising mortgage rates. The weaker sales will translate into slower price appreciation which in turn will slow consumer spending, analysts are forecasting.

That slowdown in spending should help the savings rate rise back into positive territory. But analysts are not expecting sizable improvements in savings, because as baby boomers begin to retire they will start tapping into their savings to pay for medical bills and other consumption.

The expected slowdown in consumer spending is one reason many economists are looking for overall economic growth to slow further this year. The gross domestic product grew 3.5 percent last year, down from a five-year high of 4.2 percent in 2004.

The Federal Reserve, trying to engineer a slowdown in growth that will keep inflation under control, is expected to boost rates for a 14th time at its Tuesday meeting.

A price gauge closely watched by the Fed that excludes food and energy rose by a tiny 0.1 percent in December, down from a 0.2 percent rise in November, the Commerce Department reported Monday.

For December, consumer spending rose by a bigger-than-expected 0.9 percent while incomes were up by just 0.4 percent. That forced the savings rate down for the month to a negative 0.7 percent.

___

On the Net:

Consumer spending and incomes: http://www.bea.gov

Copyright 2006 The Associated Press.



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