Savings? What’s that? Does anyone even remember?
The American mind-set in the past few years instead has been to “spend, spend, spend.” Simultaneously, consumers have taken on ever-higher debt loads, leaving little room for even retirement planning — and a resulting national savings rate of nearly zero.
There is some hint that the rate is now inching up slowly, albeit at a snail’s pace. More importantly, the current rate is still substantially below the double-digit percentage rate averages during the Seventies.
According to an April 30 research note by Maury Harris, chief economist at UBS, the current personal savings rate for March 2004 is 1.9 percent, flat compared with February. Yet, that rate represents an improvement over December 2003, when the personal savings rate was an even lower 1.4 percent. According to Harris, the rate “remains below the average of the last two years.”
The current savings rate is dismal compared with what it was more than 20 years ago. The savings rate averaged in the 8 to 10 percent range throughout the Seventies, hitting a high of 12.5 percent during the second quarter of 1975, according to U.S. government data from the Bureau of Economic Analysis.
The rate fell during the late Eighties to 5.8 percent in the second quarter of 1987, but then seesawed up and down before reaching 7.9 percent in the first quarter in 1989. It then fell to 7.1 percent in the following quarter. However, the savings rate gradually fell even further to 4.1 percent in the first quarter of 1994. While the rate climbed back up to 5.7 percent in the first quarter of 1995, it sank down to 4.2 percent in the first quarter of 1996. Americans saved even less as the years flew by, with the rate sinking to 1.7 percent in the third quarter of 1999. The all-time low was in the fourth quarter of 2001, at a 1 percent savings rate.
According to Richard Hastings, credit economist at Bernard Sands, consumers thought they were wealthy and didn’t need to save because of the so-called “wealth effect.” In short, consumers counted on the go-go days of heady stock market highs to boost their investment accounts, which made them “wealthy.” Then, after the dot-com and tech bubble burst, they counted on the rising boom in the housing market to repair the damage to their bottom lines.
“Many bought their houses with a lot of debt leverage, with the hope that housing prices would go up so they could sell it and take a profit,” he observed.
Of course, now there’s talk that consumers with cash sitting on the sidelines in their bank accounts are starting to transfer that wealth back into the stock market. Hastings isn’t so sure.
“As far as consumer spending is concerned, all eyes are on the housing market. The stock market fundamentals remain mixed, and savings has been low, in part because of wage stagnation. Wage growth is basically nonexistent. One thing is for sure: When the dam breaks, when the Federal Reserve raises its overnight lending rate, you will see the housing market cool,” Hastings predicted.
He added that, in the Seventies, when the savings rate was higher, there also was more domestic production in America. The result was that higher wages were warranted because of higher consumer costs and rising interest rates. Hastings explained that the opposite occurred in the last few years, when interest rates were lower and wages stagnated, which kept inflation low.
Of course, now there’s talk about an interest rate hike before the end of the summer. Employment figures also seem to be on the rise.
According to Harris in his research note, there is a possibility that “future upward revisions to payroll employment, which we believe has been understated, will lift the reported savings rate.”
— Vicki M. Young