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Strategies & Market Trends : Mish's Global Economic Trend Analysis -- Ignore unavailable to you. Want to Upgrade?

To: mishedlo who wrote (44903)	1/31/2006 12:17:34 PM
From: Bucky Katt	Read Replies (1) \| Respond to of 116555

Savings rate falls to minus territory, 1st such depletion since the Depression Associated Press Published January 31, 2006 WASHINGTON -- Americans' personal savings rate dipped into negative territory in 2005, something that has not happened since the Great Depression, as consumers depleted their savings to finance the purchases of cars and other big-ticket items. The Commerce Department reported Monday that the savings rate fell to minus 0.5 percent, meaning that Americans not only spent all of their after-tax income last year but had to dip into previous savings or increase borrowing. The savings rate has been negative for an entire year only twice before, in 1932 and 1933, two years when the country was struggling to cope with the Depression, a time of massive business failures and job layoffs. With employment growth strong now, analysts said that different factors are at play. Americans feel they can spend more, given that the value of their homes, the biggest asset for most families, has been rising sharply in recent years. But analysts cautioned that this behavior was risky at a time when 78 million Americans are on the verge of retirement. "Americans seem to have the feeling that it is wimpish to save," said David Wyss, chief economist at Standard & Poor's in New York. "The idea is to put away money for old age, and we are just not doing that." The report said consumer spending for December rose 0.9 percent, more than double the 0.4 percent increase in incomes last month. Incomes rose 5.4 percent for the year, down from 5.9 percent in 2004. Adjusted for inflation, disposable incomes increased 1.4 percent in 2005, the smallest advance since 1993. A price gauge that excludes food and energy rose 0.1 percent in December, down from a 0.2 percent rise in November. This inflation index linked to consumer spending is closely watched by officials at the Federal Reserve. The central bank meets on Tuesday, when it is expected it will boost interest rates for a 14th time. However, many economists believe those rate hikes are drawing to a close, with perhaps another quarter-point hike at the March 28 meeting. The 0.5 percent negative savings rate for 2005 followed a 1.8 percent rate of savings in 2004. The last negative rates occurred in 1932, a drop of 0.9 percent, and a record 1.5 percent decline in 1933. In those years Americans exhausted their savings to try to meet expenses in the wake of the nation's worst economic crisis. One major reason that consumers felt confident in spending all of their disposable incomes and dipping into savings last year was that a booming housing market made them feel more wealthy. As their home prices surged at double-digit rates, that created what economists call a "wealth effect" that supported greater spending.