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Running on empty
As household savings fall close to zero, economists worry what's ahead for economy.
February 25, 2005: 5:35 PM EST
By Chris Isidore, CNN/Money senior reporter
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NEW YORK (CNN/Money) - American households are running on empty, spending virtually all the money they have, or more, and putting nothing in the bank. But the economy is hooked on shoppers who give everything they've got at the cash register.

A government report due Monday could show that household savings is in negative territory, effectively for the first time since the commerce department started tracking it in 1947. The monthly Personal Income and Outlays report measures savings by comparing consumption -- what is spent on housing, food, fuel and other goods and services -- to income after taxes.

Fed Chairman Alan Greenspan made the low level of national savings a focus of his prepared remarks to Senate and House committees earlier this month, and other Fed policy makers have also expressed concern, particularly about what the low savings would mean for future spending by consumers.

"The household saving rate has fallen to less than 1 percent, quite low in its range of historical variation," Fed Vice Chairman Roger Ferguson said in a speech last fall. "If households, on net, take steps to return the saving rate closer to the middle of that range, which, I might add, would provide welcome support to capital accumulation, then a sustained period in which consumption grows more slowly than income would result."

As recently as the early 1990s, personal savings were equal to about 7 percent of disposable income, and even in the go-go stock market bubble years of the late '90s, the savings rate stayed close to 3 or 4 percent.

One reason for the low savings rate is the strong real estate market. Many homeowners believe that rising real estate values give them the necessary savings they would otherwise set aside.

Homeowners can also raise funds through home equity loans and mortgage refinancings, which gives them more cash to spend than just income.

Some economists worry that when mortgage interest rates start to rise, it'll cause a decline in housing prices which could quickly cut into overall spending, either because consumers no longer have equity to draw upon or because they will become worried about their lack of savings.

"People got thrown for a loop by the stock market crash at beginning of the decade," said Tom Schlesinger, executive director Financial Markets Center. "It doesn't seem impossible that local housing bubbles bursting would have an effect on people's views of savings. Obviously consumption would take a hit if people save at the historic rate."

Economists argue the pace of consumers' spending compared to their income can't last, no matter what happens to housing prices.

"They can't continue to spend beyond their income indefinitely," said Dean Baker, co-director of the Center for Economic Policy Research. "If people are building up large amounts of debt, you reach a point where they can't continue."

Baker, Schlesinger and others say that when savings do cross into negative territory, it's more of a symbolic rather than actual problem for the nation's economy. The savings rate is already at such negligible levels that a drop below zero is likely to be a relatively minor one. But the only thing worse for the economy than a negative savings rate could be trying to break the economy's dependence on households spending everything they bring in, and more.

Personal savings has dropped into negative territory before, but it was in October 2001, when automakers started offering attractive financing incentives to spur auto sales in the wake of the Sept. 11 terrorist attacks. Since the entire cost of the vehicle is included the month it is purchased, record car sales that month caused a statistical blip of negative savings.  Top of page


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