CNN - fn

http://cnnfn.com/1999/06/28/economy/economy/

Personal income up 0.4%

But May consumption grows faster, pushing savings rate to all-time low

June 28, 1999: 9:10 a.m. ET

NEW YORK (CNNfn) - Americans' incomes rose in May, but their rate of spending climbed at a higher rate, the government said Monday, pushing the nation's personal savings rate to an all-time low. Personal income rose 0.4 percent in May, from 0.5 percent a month earlier, the Commerce Department said Monday. Spending climbed 0.6 percent from 0.4 percent the month before. This imbalance between earnings and consumption helped push the nation's savings rate to minus 1.2 percent, the lowest level since the department began keeping statistics in 1959. Monday's report came in close to analysts' expectations. Economists surveyed by Reuters had expected personal income to rise 0.5 percent and spending to increase 0.6 percent. The May figures continue a six-month trend of negative savings and comes after another record low rate in April. This pattern has caused economists to worry about tough consequences if America's economy turns sour. The spending rate, meanwhile, is also part of a pattern which has been credited for the booming economy. "It's looking like this party we're all talking about has turned into a gala," said Richard Yamarone, senior economist at Argus Research told CNNfn. The high spending rate is one of the reasons that Yamarone and others say the Federal Reserve this week will raise interest rates to preempt inflation While the bond market showed scant reaction to the report, Yamarone said the figures will be closely scrutinized, particularly for their contribution to second-quarter gross domestic product. "This will help shape policy in months to come," he said The 30-year Treasury bond rose slightly on the news, climbing up 6/32 to yield 6.13 percent. The bond was up 3/32 just before the report.

-- Old Git (anon@spamproblems.com), June 28, 1999

Answers

Part of what is reflected in the record-low savings rate is the degree to which many Americans with middle-class and higher incomes are putting money in the stock market as their "savings", instead of into bonds or savings accounts. The people who are doing this feel like "savers", when they are actually just gamblers. They actually believe that the market will always go higher on a year-over-year basis, and dips are just opportunities to buy more. It is an example of what I would call "the fallacy of limited experience."

I predict the savings rate will continue in negative territory until the stock market goes south. Of course, my track record at predicting the future rivals that of most psychics in supermarket tabloids. But, being wrong never stopped Jeanne Dixon from making predictions, so why should it stop me?

-- Brian McLaughlin (brianm@ims.com), June 28, 1999.

The reduction in savings rate is not because of the stock market. Americans are buying everything in site. They are overspending on housing and running up(and maintaining), high credit card balances. You can see the effect of the credit cards balances in the increase number of bankrup household filings. Also, take a look at the commercials. It seems that everyone can refinance their credit card debt to a lower rate as long as they take a secured loan against their house. Isn't that sneeky, you move your debt to a lower rate(good) and they now can attach a lean and forclose on your house. The credit card companies can't do that until you take out that home equity loan.

People have to reduce their spending, that is the bottom line. They have to learn to live within their means. They do not just tighten their belt like their parents did. Maybe self control was the only thing that our parents forgot to pass on.

Anyway, now that the economy is good, it is the time to pay off your debts. You will want as little debt as possible when the downturn comes. Funny, I see it just around the corner.

-- Ned P Zimmer (ned@nednet.com), June 28, 1999.

1. there is very little incentive to save with bank interest rates so low. That 10% growth rate in the stock market then looks very good...and folks keep getting told they are "saving" in the long term.

2. The advertising world is spending huge amounts of money to manipulate people to buy all sorts of garbage, creating artificial needs. One way to free oneself of this manipulation is to cut off the media- tv, magazines, etc. I went to see the new Star Wars, and had to sit through 10 minutes of ads for a movie I paid to see!

3. And, a few of us are putting our savings into tangible assets for y2k and whatever other disasters are so clearly coming down the pike.

-- seraphima (seraphima@aol.com), June 28, 1999.

With interest rates low and governmnet confiscation high why would any poor slob put money into the money changers greedy mud hooks?

Every nickle I put into the bank savings was taken by the IRS. I've never been able to keep ahead of them. Self Employed!

Screw them!

-- freeman (freeman@cali.com), June 29, 1999.

Everyone with a credit card is spending everyone else's (and their own) IRA or 401(k).

There's no reservoir of money "saved" out there. It's all pooled into various promises to repay.

Credit card debt may be at the low end of the hierarchy but it tugs all the others down. Treasury debt, at the top, is just the IRS's ability to tap our paychecks, along with the credit card payments and all the others.

Question: Can the different pools of debt be segregated if one goes down to default, or do they all interact, perhaps fatally?

-- jor-el (jor-el@krypton.uni), June 29, 1999.

Some of us may save in different ways. I may save by stockpiling food against a rainy day, hurricane, or Y2K. I also save by dumping coins and bills into my piggy bank...(it's tough to save when you have a vow of poverty...)

-- Mad Monk (madmonk@hawaiian.net), June 29, 1999.

jor-el, clearly some promises-to-pay are safer than others. An account at your local bank is clearly safer than the stock market. And, as was pointed out, whatever is invested in stocks is actually a form of gambling. Of course, come 1/1/2000, the same can be said of your bank account too! (Actually, if bank runs occur before then, guess we better consider that to be somewhat risky too!)

Except for a local bank account that I keep just to be able to pay via checks, I am completely out of "the system". Cash in small denominations, gold American Eagles, and 90% junk silver. That is my Y2K compliant diversified portfolio.

-- Jack (jsprat@eld.net), June 29, 1999.