Feeding the Piggy Bank Could
Hurt U.S. Expansion
Thu Sep 23, 2004
By Victoria Thieberger
NEW YORK (Reuters) - For years, profligate
American consumers have been chided for putting aside nothing
for a rainy day.
Now, with the Federal Reserve raising interest
rates, the prospect that households could start to rebuild their
savings raises another worry: a slowdown in spending, just when
the economy is struggling to regain its footing.
Even some senior officials within the Federal
Reserve are concerned about the potential fallout from increased
savings, which could be a side-effect of the central bank's
campaign to boost interest rates.
The Fed this week raised official interest
rates for the third time since June, making savings more attractive.
Banks have reported a surge in interest in certificates of deposit
in recent months.
"With interest rates rising and equity
prices declining, households may try to get their finances in
order and bring the saving rate up to more normal levels by
cutting spending," San Francisco Fed President Janet Yellen
said in a recent speech.
"A noticeable increase from today's historically
low levels could have important adverse consequences for the
pace of economic expansion going forward," she cautioned.
The savings rate -- the difference between
what Americans earn and what they spend -- has gradually drifted
down from the 7 percent to 8 percent range a decade ago to just
positive rates of hovering between 0.5 percent and 2.0 percent.
In July, the rate dropped to a near-record
low of 0.6 percent while incomes barely rose 0.1 percent, suggesting
consumers will find it increasingly difficult to fund their
The low rate is seen as symptomatic of America's
many sins of economic excess, such as pushing up the current
account deficit to 5 percent of the economy and running huge
ANOTHER CLOUD ON THE HORIZON
If the labor market doesn't pick up strongly
from the anemic growth rates of the past three months, consumers
may be tempted to boost savings as a cushion for the future.
That was the concern raised by the International
Monetary Fund in a recent scorecard on the U.S. economy. IMF
economists warned that "any upward adjustment (to savings)
could weigh on the short-term outlook ... and a larger correction
in the savings rate remains a risk if the economic recovery
Americans have run down their savings as their
assets have grown, first with out-sized returns on equities
in the bubble years and now in housing, where values have soared
nearly 40 percent since late 2000, according to recent Fed data.
Goldman Sachs senior economist Jan Hatzius
said investors seem too optimistic about likely long-term asset
returns, and therefore are not saving enough. He estimates the
personal savings rate needs to rise to around 10 percent over
the next five to 10 years.
"Our best guess is that the adjustment
will be a long slog that keeps consumption growth sluggish for
several years, but does not involve an outright spending slump,"
As official interest rates plunged through
2001 and remained near historical lows around 1.0 percent, there
has been little incentive to build savings.
The slide in savings comes just as retirement
looms for the first wave of baby boomers, a massive demographic
shift that should tend to raise the savings rate. The Bush administration
has looked at various schemes, such as tax incentives, to make
savings more attractive.
Still, the immediate downside of a minimal
savings level is unclear, especially when compared with the
anemic economies of high-savings nations such as Germany (11.1
percent savings rate), France (also 11.1 percent) and Japan
(6.4 percent), according to OECD data.
For example, Australia's economy has chugged
along quite comfortably despite a negative savings rate in 2002,
2003 and most likely in 2004, 13 years into an economic expansion.
"For some economists, the low (U.S. rate)
looks like an aberration or an imbalance that will create problems
down the road," said JP Morgan senior economist Jim Glassman.
"But the average household has benefited
from this huge wealth gain over the past decade. Today's generation
is better off than previous ones and that's why savings is where
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