Net Personal Saving Negative over First 11 Months of 2005

Net personal saving among Americans fell in November of last year for the sixth month in a row. Dropping by an annual, seasonally adjusted rate of —0.2% in the second-to-last month of 2005, the negative value marked the seventh month of last year that personal consumption exceeded income. According to Keith Leggett of the American Banking Association, if the December figure comes out to be negative, as well, 2005 will be the first year since the Great Depression that personal spending exceeded personal income on average over the course of an entire calendar. In other words, should the trend hold for December, it would be the first time since the the 1930s that Americans on average had spent more than they earned through an entire calendar year.
The graph above, derived from data provided by the Federal Reserve Bank of St. Louis illustrates the erosion during 2005 of consumers' ability to sustain spending with income. Since the second quarter of the year, Americans were drawing down savings or they were borrowing to keep the economy growing at what appeared to be a blistering pace that reached a feverish 4.1 percent in the third quarter. Some of the excess of consumption over income was no doubt coming from homeowners borrowing on the equity in their property, a situation that could prove most unfortunate should home prices begin to fall as some economists expect for the current year. Essentially, the homeowners who are taking out second—and in some cases third—mortgages are converting a highly illiquid asset, which has been the basis for their rising net worth, into a more liquid form that could be used for current buying.

The erosion of net personal savings is dramatically illustrated in the graphic at left, which presents the data for both 2004 and the first 11 months of 2005. From consistently, relatively strong in 2004, the ability of consumers to sustain consumption with income lost steam in the fourth quarter of 2004. In fact, were it not for the anomalous spike in September of 2004, the decline would appear to have begun somewhat earlier. There is no doubt, however, that the -0.2% figure in November of last year is part of a long term trend that has seen households borrowing and drawing down long-term savings to maintain to the extent possible consumption patterns and lifestyles not consistent with real incomes. Although some believe that a high personal savings rate is desirable for the American economy, any rise in the amount of income consumers save would at this point only exacerbate an already difficult situation: about two-thirds of GDP is devoted to consumption, meaning that any added savings at the expense of consumer spending would lower gross domestic product. More importantly, because of the so-called "multiplier effect," any reduction in the marginal propensity to expend (the fraction spent of the last dollar of income), would magnify a pullback in GDP caused by increased personal savings.

With inflation pressures building in the economy, interest rates rising, and persistent federal budget deficits preventing the government from using fiscal stimulus to soften the effects of an economic downturn, the outlook for this year is not at all bright.

Despite the Bush Administration's continuing focus on good news figures about the health of the American economy, evidence is mounting that the short-term successes being touted have been achieved at the expense of long-term corrosion of underlying structure, as consumers drain their savings for the future in an effort to hold onto consumption patterns and lifestyles that will slip away with their net worth that is eroding. The extent to which citizens appreciate this may help them determine whether or not they wish to return to power in the mid-term elections of this November the political party that has brought about this nearly irreparable situation.


The Dark Wraith will provide more news on Depression-era economic data as events merit.