at record lows ... and record
Is it a bad thing?
The status of the American consumer's balance sheet
isn't all doom and gloom, Leggett says. He points to
Federal Reserve statistics to show that even as Americans
are spending more and borrowing more, their net worth
continues to go up.
Leggett points out that, driven by asset
appreciation that is outpacing their spending, the net
worth of American households at the end of the first
quarter of 2006 was $53.8 trillion. By comparison, in
2002, the household net worth was $39.1 trillion.
Unfortunately, stagnating home values,
a dip in stock prices or some unforeseen calamity could
cause the whole equation to shift radically out of balance.
This may be part of the motivation behind
the Federal Reserve's latest policy of driving up the
federal funds rate.
"You would clearly see that higher
interest rates would cause people to consume less,"
Leggett says. "It would slow down consumption by
causing borrowing to be more expensive."
Higher interest rates also reward consumers
who save a bit at the end of each month by yielding
more returns on those deposits.
Foreign markets could also force the American
consumer to buy less through worsening exchange rates.
As foreign investors see Americans sinking further into
debt, they may begin to have doubts about the long-term
strength of the economy. That could cause them to lose
their taste for U.S. investments and stop pouring money
into our markets. Any interruption in that cash flow
would drive down the value of the dollar, which would
make imports more expensive.
"Organizations such as the Federal
Reserve try to make the landing soft by heading off
trends, such as inflation and overspending, before they
force a market correction," Leggett says.
But Leggett and other economists, such
as Milt Marquis, senior economist for the Federal Reserve
Bank of San Francisco, who wrote an issue paper on the
savings rate, believe that even without a rise in interest
rates, the nation's consumption would balance out as
other aspects of the economy shifted.
"A slowdown in economic activity could potentially cause a decline in asset values," Leggett says. "If you are insecure about the economy you are going to save more."
Laufenberg says he is dubious as to whether concern
about the negative savings rate is even warranted.
"I get a kick out of the claim that this is the first time since the Great Depression that the personal saving rate has been negative," he says. "As currently measured, that is correct, but the personal saving rate was estimated to have been negative before only to be revised upward as more complete data became available. Hence, it is reasonable to expect that the current negative saving rate will be revised upward eventually as well."
Leggett predicts that beginning in 2007 the statistics will shift and spending will fall.
"During the '80s and '90s, Baby Boomers
were in their peak household formation period. That
represents their peak consumption," Legett says.
"As they age they will shift back to a saver mode."
And even as they fret about the declining
savings rate, economists actually worry about consumers
saving too much. That's because every dollar consumers
choose not to spend takes money out of the economy,
reducing corporate profits. If consumers were to stop
spending in mass, the economy could grind into a painful
Esoteric economic arguments aside, most
financial planners agree that when it comes to savings,
every family should have a sufficient emergency fund
set aside to protect them from financial disaster.
In most cases, families should have at least three to six months of expenses set aside just in case, not to mention enough to finance an extended retirement.
Michael Giusti is a freelance writer based in New Orleans.