America saves, as individuals spend

Americans aren't saving. Or are they?

In recent months, when the monthly personal income and consumption numbers sail out of Washington (next time March 1), they show that consumers aren't saving. They are spending more than they are earning.

As measured by the Commerce Department, the rate of personal savings has plunged from an average 7.7 percent in the 1960s and 1970s and 7 percent in the 1980s, to close to zero last year. That's the first time this has happened since 1933 - the heart of the Great Depression.

"There's been a fair bit of hand-wringing in the press," says Richard Rippe, a Prudential Securities economist in New York.

Americans were described as spendthrifts - engaged in a buying binge that must come to an end, causing a recession.

Then some economists began to have second thoughts. Maybe it isn't so bad after all.

"Saving in the United States has not collapsed but rather is advancing and appears to be rather high," reckons Mr. Rippe.

"While the recent strong growth in consumption seems unsustainable, the fundamentals do not point to collapse," argues Mickey Levy, chief economist, Bank of America Corp.

Here's why:

First, personal savings are only one element of national savings. Personal savings are what is left after personal consumption is subtracted from disposable personal income (income minus taxes). National savings also includes business savings, which are healthy, and government savings, which are booming.

For the first time in decades, the federal government had a surplus last year - some $70 billion. States and municipalities also racked up large surpluses.

Adding the three elements, national savings stands about 17.4 percent of gross domestic product. That's not bad. It's about the same as in the 1980s.

Second, personal savings are defined narrowly. They don't include other measures of household wealth, such as gains in stock prices and house prices.

Net worth of households (and nonprofit corporations) has doubled in the past decade to about $33 trillion, says Rippe.

When the market value of the stocks in the nearly all-encompassing Wilshire 5000 Index is added up, they are worth about $12.6 trillion now compared with $3.3 trillion at the end of 1989. Bonds have also risen in value as interest rates fell.

With capital gains added to personal savings, the savings rate rises to 6 percent, calculates Merrill Lynch chief economist Bruce Steinberg in New York. On a per capita basis, the net worth of Americans was $69,061 in 1987. It was $123,911 in 1997, undoubtedly more now.

Capital gains are not defined as income as an accounting rule. But individuals who sell stock or other assets at a profit have been spending some of those capital gains -after taxes, of course.

Looking to the future, could a stock-market crash hit savings and spending so hard that the economy slumps?

Rippe doubts it, noting that it didn't happen in last fall's market "correction" or the 25 percent drop in stock prices in 1987.

Wynne Godley, a British economist doing work at The Jerome Levy Institute, Annandale-on-Hudson, N.Y., is less sure. He says the burst of spending by households and companies well in excess of after-tax income and financed by higher borrowing, cannot continue.

"It is a process which is finite" he says.

Since the US has been acting as "the world's spender of last resort," holding up other economies by its imports, a US slump would be bad news.

But Rippe doesn't expect consumer demand to collapse. So the nation's economic expansion isn't in danger, he figures.