You can find the graphics at http://www.goldenbar.com/
but you'll have to hunt for the link (What are the bull's saying?). Kind of a mixed message, some interesting polly points about personal savings.
Fair use for edu/discussion purposes
The Economy
Hey, Big Spender
By Rebecca Thomas
April 25, 2001 A QUICK TRAWL through the business headlines of your local newspaper tells the story: Layoffs are up, the stock market is down and the economy is grinding to a halt. As a result, many experts say, consumers may start to rein in their spending — an outcome that threatens to plunge the stalled economy into a full-fledged recession.
At first glance, that scenario seems entirely plausible. After all, according to government statistics, the U.S. savings rate is so low it has actually turned negative for the first time since the Great Depression. At the same time, household debt is at record levels and the stock market's slide has erased some $4 trillion in paper wealth. A little personal belt-tightening might well be in order.
Unfortunately, that could do more harm than good.
"The fear is that consumers, upon receiving their investment statements, will be shocked into saving more," wrote Lehman Brothers economists Joseph Abate and Ethan Harris in a note titled "Paradox of Thrift." "The collective effort to restore saving, and cut consumption, could be the final straw pushing the economy into recession." Simply restoring the savings rate to zero would lop off almost a percentage point of gross domestic product at a time when the economy is barely growing. (The initial estimate will be released Friday.) In these frightful times, a penny saved may be a penny burned.
How did consumers get so tapped out? Chalk it up to the go-go '90s, when many Americans forsook traditional wage-based saving and instead came to view capital gains as a new and permanent source of saving, says Stephen Roach, Morgan Stanley's chief economist. As a result, the personal saving rate — simply a measure of income minus taxes and consumption — declined to a negative 1.3% in February from a peak of 8.9% in 1993. It has continued to fall even in the face of dissipating stock wealth and slowing wage growth, and now sits around 10 percentage points below the 45-year historical norm of 8.5%.
The negative savings rate means that people are spending more than they earn — and they can make up the difference in one of only two ways. They can take gains from existing assets, like stock portfolios or real estate, or they can go into debt. Mostly, consumers have been doing the latter: Household-sector liabilities rose by 120% between 1994 and 2000, calculates Roach. In February — the last month for which data are available — consumer debt (including credit cards and consumer loans) sat at a record $1.56 trillion, according to the Federal Reserve, up 10.5% from a year ago. Mortgage debt, meanwhile, rose at a 9% annual rate in the fourth quarter to $5 trillion.
Not surprisingly, consumers are now spending a greater proportion of their income to service this debt. The ratio of debt payments to disposable personal income — the so-called debt-service burden index — rose to 14.29% in the fourth quarter, the Fed reports. That's well above the 13% to 13.5% level recorded during the recession of 1990-91, and is the highest reading since 1986.
Even worse, measures of debt payments don't include an enormous pile of arrears never counted by statisticians. Says Stuart Feldstein, president of SRM Research: "The most troubling thing is that no one knows what household debt really is." The Fed's measure of mortgage debt, for example, excludes the liabilities of renters, even though this population makes up 33% of all households. Moreover, no one's calculated medical, alimony and child-support debts. That's particularly worrisome since these forms of debt largely affect the poor and uninsured — those who are most likely to default or file for bankruptcy. "It's a threat to the banking system that keeps building," says Feldstein. "To the extent that banks protect themselves by raising interest rates, it's a threat to consumer spending. To the extent that they don't, it's a direct threat to the financial system."
Given all these gloomy numbers, it would appear that the low savings rate has put the U.S. economy in a perilous predicament, requiring major deficit spending on the part of consumers when they can least afford it.
Not exactly. It turns out that, despite these startling statistics, personal balance sheets seem to be in reasonably good shape. In fact, by historical standards, households are better off than at any time before — barring the last 12 months, of course. That means that, while any further decline in the savings rate seems unlikely, there's little reason to believe that the sharp drop in the savings rate over the past five years will be reversed anytime soon, says UBS Warburg economist James O'Sullivan. Rather, he says, the savings rate will probably drift up gradually, posing little immediate threat to consumption.
Extra Credit
*not seasonally adjusted
Data from December 1990 to February 2001
Source: Federal Reserve
Why the optimism? Despite the disappearance of $4 trillion in equity wealth over the past year, which wiped out all of the gains registered between March 1999 and March 2000, household net worth (assets such as homes and stock portfolios minus liabilities such as mortgage and credit-card debt) has nevertheless doubled in the past 10 years. Most of those gains, says Lehman's Abate, can be attributed to the surge in stock wealth, to $18 trillion last year from $4 trillion in 1991. The appreciating value of real estate (which accounts for 20% of household wealth) also played a part.
And because the government excludes appreciation of existing assets like stocks or real estate from its official measure of personal savings, the amount of wealth accumulation over this time period has been vastly understated. (Ironically, the government omits the capital gains on assets but includes the surge in capital-gains taxes, which depresses the savings rate.) When capital gains are added back into the equation, the savings rate — though on the decline since 1999 — comes close to 8% for last year, estimates Celia Chen, an economist at West Chester, Pa.-based research firm Economy.com. (Since 1994, this adjusted rate has averaged 9.3%.)
Similarly, it's more useful to measure debt payments against liquid financial assets — which include such components as savings deposits, money-market funds, mutual funds and direct stock holdings — than against after-tax income, says John Lonski, an economist at Moody's Investors Service. Here again, largely because of equity appreciation, the numbers are more encouraging: This ratio has fallen to 6% today from 8.2% in 1990. "That tells us that the [recent] decline in equity prices hasn't come close to reversing the gains registered in the five years ended 1999," Lonski says.
All this suggests that households probably won't abandon the mall for the bank anytime soon. Indeed, those investors who are likely to spend rather than reinvest their capital gains tend to be among the highest income earners — those who have already built up a cushion of wealth to guard against a downturn, notes Bank One chief economist Diane Swonk. With the exception of those dot-com millionaires who've gone bust, most of the wealthy are spending as usual, she explains. Bill Gates, for one, hasn't interrupted construction on an addition to his home.
Certainly, as Roach notes, households will need to "relearn the art of saving from wage income" to some extent in the postbubble era. But economists widely expect any upward creep in the savings rate to be gradual barring any long-term collapse in the stock or labor markets. "Consumers are likely to spend a little less, save a little more and pay down some debt," says Stephen Brobeck, executive director of the Consumer Federation of America, a consumer advocacy organization.
So take heart: A huge savings spike probably won't be driven through the heart of the economy. Which is good news, since there are plenty of other economic problems to worry about these days.
but you'll have to hunt for the link (What are the bull's saying?). Kind of a mixed message, some interesting polly points about personal savings.
Fair use for edu/discussion purposes
The Economy
Hey, Big Spender
By Rebecca Thomas
April 25, 2001 A QUICK TRAWL through the business headlines of your local newspaper tells the story: Layoffs are up, the stock market is down and the economy is grinding to a halt. As a result, many experts say, consumers may start to rein in their spending — an outcome that threatens to plunge the stalled economy into a full-fledged recession.
At first glance, that scenario seems entirely plausible. After all, according to government statistics, the U.S. savings rate is so low it has actually turned negative for the first time since the Great Depression. At the same time, household debt is at record levels and the stock market's slide has erased some $4 trillion in paper wealth. A little personal belt-tightening might well be in order.
Unfortunately, that could do more harm than good.
"The fear is that consumers, upon receiving their investment statements, will be shocked into saving more," wrote Lehman Brothers economists Joseph Abate and Ethan Harris in a note titled "Paradox of Thrift." "The collective effort to restore saving, and cut consumption, could be the final straw pushing the economy into recession." Simply restoring the savings rate to zero would lop off almost a percentage point of gross domestic product at a time when the economy is barely growing. (The initial estimate will be released Friday.) In these frightful times, a penny saved may be a penny burned.
How did consumers get so tapped out? Chalk it up to the go-go '90s, when many Americans forsook traditional wage-based saving and instead came to view capital gains as a new and permanent source of saving, says Stephen Roach, Morgan Stanley's chief economist. As a result, the personal saving rate — simply a measure of income minus taxes and consumption — declined to a negative 1.3% in February from a peak of 8.9% in 1993. It has continued to fall even in the face of dissipating stock wealth and slowing wage growth, and now sits around 10 percentage points below the 45-year historical norm of 8.5%.
The negative savings rate means that people are spending more than they earn — and they can make up the difference in one of only two ways. They can take gains from existing assets, like stock portfolios or real estate, or they can go into debt. Mostly, consumers have been doing the latter: Household-sector liabilities rose by 120% between 1994 and 2000, calculates Roach. In February — the last month for which data are available — consumer debt (including credit cards and consumer loans) sat at a record $1.56 trillion, according to the Federal Reserve, up 10.5% from a year ago. Mortgage debt, meanwhile, rose at a 9% annual rate in the fourth quarter to $5 trillion.
Not surprisingly, consumers are now spending a greater proportion of their income to service this debt. The ratio of debt payments to disposable personal income — the so-called debt-service burden index — rose to 14.29% in the fourth quarter, the Fed reports. That's well above the 13% to 13.5% level recorded during the recession of 1990-91, and is the highest reading since 1986.
Even worse, measures of debt payments don't include an enormous pile of arrears never counted by statisticians. Says Stuart Feldstein, president of SRM Research: "The most troubling thing is that no one knows what household debt really is." The Fed's measure of mortgage debt, for example, excludes the liabilities of renters, even though this population makes up 33% of all households. Moreover, no one's calculated medical, alimony and child-support debts. That's particularly worrisome since these forms of debt largely affect the poor and uninsured — those who are most likely to default or file for bankruptcy. "It's a threat to the banking system that keeps building," says Feldstein. "To the extent that banks protect themselves by raising interest rates, it's a threat to consumer spending. To the extent that they don't, it's a direct threat to the financial system."
Given all these gloomy numbers, it would appear that the low savings rate has put the U.S. economy in a perilous predicament, requiring major deficit spending on the part of consumers when they can least afford it.
Not exactly. It turns out that, despite these startling statistics, personal balance sheets seem to be in reasonably good shape. In fact, by historical standards, households are better off than at any time before — barring the last 12 months, of course. That means that, while any further decline in the savings rate seems unlikely, there's little reason to believe that the sharp drop in the savings rate over the past five years will be reversed anytime soon, says UBS Warburg economist James O'Sullivan. Rather, he says, the savings rate will probably drift up gradually, posing little immediate threat to consumption.
Extra Credit
*not seasonally adjusted
Data from December 1990 to February 2001
Source: Federal Reserve
Why the optimism? Despite the disappearance of $4 trillion in equity wealth over the past year, which wiped out all of the gains registered between March 1999 and March 2000, household net worth (assets such as homes and stock portfolios minus liabilities such as mortgage and credit-card debt) has nevertheless doubled in the past 10 years. Most of those gains, says Lehman's Abate, can be attributed to the surge in stock wealth, to $18 trillion last year from $4 trillion in 1991. The appreciating value of real estate (which accounts for 20% of household wealth) also played a part.
And because the government excludes appreciation of existing assets like stocks or real estate from its official measure of personal savings, the amount of wealth accumulation over this time period has been vastly understated. (Ironically, the government omits the capital gains on assets but includes the surge in capital-gains taxes, which depresses the savings rate.) When capital gains are added back into the equation, the savings rate — though on the decline since 1999 — comes close to 8% for last year, estimates Celia Chen, an economist at West Chester, Pa.-based research firm Economy.com. (Since 1994, this adjusted rate has averaged 9.3%.)
Similarly, it's more useful to measure debt payments against liquid financial assets — which include such components as savings deposits, money-market funds, mutual funds and direct stock holdings — than against after-tax income, says John Lonski, an economist at Moody's Investors Service. Here again, largely because of equity appreciation, the numbers are more encouraging: This ratio has fallen to 6% today from 8.2% in 1990. "That tells us that the [recent] decline in equity prices hasn't come close to reversing the gains registered in the five years ended 1999," Lonski says.
All this suggests that households probably won't abandon the mall for the bank anytime soon. Indeed, those investors who are likely to spend rather than reinvest their capital gains tend to be among the highest income earners — those who have already built up a cushion of wealth to guard against a downturn, notes Bank One chief economist Diane Swonk. With the exception of those dot-com millionaires who've gone bust, most of the wealthy are spending as usual, she explains. Bill Gates, for one, hasn't interrupted construction on an addition to his home.
Certainly, as Roach notes, households will need to "relearn the art of saving from wage income" to some extent in the postbubble era. But economists widely expect any upward creep in the savings rate to be gradual barring any long-term collapse in the stock or labor markets. "Consumers are likely to spend a little less, save a little more and pay down some debt," says Stephen Brobeck, executive director of the Consumer Federation of America, a consumer advocacy organization.
So take heart: A huge savings spike probably won't be driven through the heart of the economy. Which is good news, since there are plenty of other economic problems to worry about these days.