Savings hits record low, or does it?

Savings hits record low, or does it?

Measurement is a relic from a bygone era, some argue

By Aaron Knopf MSNBC


June 28 — Americans may be saving more than the government thinks. The Commerce Department released figures Monday showing that the personal savings rate had fallen to a record low in May. Yet some economists think that the calculation is flawed. Because it does not include capital gains from investments in individual stocks and 401(k) retirement plans — some of the most preferred savings vehicles in the late ’90s — the measurement is archaic and needs to be updated.

‘You have an enormous amount of savings that are not being recorded — 401(k), all capital gains. If you put them in you would have a savings rate that would be enormous.’
— DELOS SMITH
The Conference Board Senior Business Analyst

CONSUMER SPENDING has grown faster than incomes for all of 1999, according to the Commerce Department. Last month, spending rose 0.6 percent while personal income, which includes wages, interest and government benefits, went up 0.4 percent.
That trend has helped to drag the nation’s savings rate — savings as a percentage of after-tax income — to a string of record lows. The minus 1.2 percent savings rate for May comes after a minus 1 percent rate in March and April, a minus 0.7 percent rate in February and a minus 0.3 percent rate for January. These January through April figures all are more negative than the Commerce Department had previously announced.
But Delos Smith, senior business analyst at the Conference Board, said that the method the government used to calculate these figures was “silly,” and not attuned to the way people save their money in the late 1990s.
“I don’t think we are in negative territory,” Smith said. “You have an enormous amount of savings that are not being recorded — 401(k), all capital gains. If you put them in, you would have a savings rate that would be enormous.”

Smith said it was time for the government to change the calculation that the Commerce Department began using in 1959.
Statistics about participation in 401(k) retirement plans, a type of tax-deferred investment account offered by many employers, lend credence to Smith’s assertion.

Fed rate hike is all but inevitable

An estimated 34 million U.S. workers contributed some portion of pretax earnings to 401(k) plans last year, up from about 25 million in 1993, according to the Profit Sharing/401(k) Council of America.
During those years, the Dow Jones industrial average, a widely regarded stock-market benchmark, rose from about 3,300 to about 9,100. The Dow is even higher now, closing Monday at about 10,655.
Yet none of the wealth created in peoples’ 401(k) accounts or other stock accounts during this massive market run-up is measured in the government’s income and savings rates. But the way people use the money they’ve made from their investments is recorded, skewing the perspective on Americans’ spending and saving habits.
Most economists agree that the growth in personal spending is attributable directly to capital gains from investments or home sales.
“Households are apparently managing their finances differently in this environment of rapidly increasing equities than in the past,” said William Sullivan, senior economist at Morgan Stanley Dean Witter.



		Consumers continued to spend more money than the earned in May, reports CNBC’s Hampton Pearson

Sullivan said that growth in the stock market as well as low unemployment contributed to a sense of consumer confidence. Unlike Smith, however, he is not as sure of the strength of its foundation.
“The chairman of the Fed has talked about the asset bubble, and when it bursts you have negative consequences,” he said. “The risk is when you eliminate that equity wealth, what happens to that spending and that confidence?”
But Smith noted that as long as the stock market stays strong, consumer spending and the economy are likely to keep growing.
The White House is banking on such a scenario. It announced on Monday that it expected robust growth for this year and next, revising its 1999 economic growth forecast to 3.9 percent from 2 percent. It sees 2.4 percent growth next year.
Whether the government is incorrectly estimating the level of people’s savings, some economists have issued words of warning to those who are banking on continued stock market gains, tax refunds and other benefits of the strong economy to fund their spending habits.
“You can’t spend what you don’t have forever without paying the piper, ” said Astrid Adolfson, senior economist at MCM MoneyWatch. “And the creditors will get you.”

The Associated Press and Reuters contributed to this report.

Intrigue behind the iToaster

Wall Street climbs

Fed rate hike is all but inevitable

What will the Fed decide to do?

Americans save less, or do they?

	MSNBC VIEWER'S TOP 10

	Would you recommend this story to other viewers? not at all 1 - 2 - 3 - 4 - 5 - 6 - 7 highly

MSNBC is optimized for
• Microsoft Internet Explorer
• Windows Media Player

• MSNBC Terms,
	Conditions and Privacy © 1999