Why A Negative Savings Rate Isn’t All That Worrisome

From the AP:

Personal Savings Rate for 2006 Drops to Negative 1 Percent, the Lowest Level in 74 Years

“The Commerce Department reported Thursday that the savings rate for all of 2006 was a negative 1 percent, meaning that not only did people spend all the money they earned but they also dipped into savings or increased borrowing to finance purchases. The 2006 figure was lower than a negative 0.4 percent in 2005 and was the poorest showing since a negative 1.5 percent savings rate in 1933 during the Great Depression.

The savings rate has been negative for an entire year only four times in history — in 2005 and 2006 and in 1933 and 1932. For December, the savings rate edged down to a negative 1.2 percent, compared to a negative 1 percent in November. The savings rate has been in negative territory for 21 consecutive months.”

You can definitely put me in the camp that claims the U.S. economy is nowhere near as good as the stock market is telling us, but at least one statistic used by the pessimists out there is really not a big deal; the personal savings rate.

We keep hearing how the rate has been negative and what that tells us about the American consumer’s balance sheet. However, the statistic is very misleading. One would think that calculating a savings rate would include accounting for what most people consider to be “savings.” That is, money that is put away for future use and not spent.

Unfortunately, the personal savings rate simply takes one’s disposable income (income after taxes are paid) and subtracts spending. Actual savings, most notably retirement savings in 401(k) plans and IRA’s, is not actually counted as savings in this statistic. So, you can see that we really can’t conclude that people aren’t saving nowadays. We just don’t know how much people are saving from this number alone.

What we do know is that debt levels are rising in the American household, but we already knew that. We know the average American has thousands of credit card debt, and with historical low interest rates and very easy credit, it’s no surprise people are accessing it. However, without including monies earmarked specifically for savings by consumers, the personal savings rate really doesn’t tell us as much as some would like you to believe.