Image Source: St. Louis Federal Reserve

This is a little off the topic of small business but I think it affects each and every one of us.

An interesting discussion is taking place over at Vox Baby about personal savings.

According to the GDP Report, consumer confidence in the economy is up, yet personal savings is down.

In fact, the U.S. Personal Savings Rate has not been positive for the U.S. since March of 2005.

Some argue that this has to do with baby boomers funding higher education for their children.

Others suggest looking at income quintiles. “The topmost quintile is very, very confident that their income will stay high come what may. So why save?”

The personal savings rate does not include capital gains on investments as a method of saving.

William Gale, a tax specialist at the Brookings Institution in Washington, D.C., says the situation isn’t as bad as it seems and it’s a mistake to look at the personal savings rate and think it correlates with wealth accumulation.

“For wealth accumulation you need capital gains. … it is [important] to look at the right measurement. The personal savings rate is good as a national income accounting measure.”

“I wonder how it can be that with the Baby Boomer generation in the high-income and presumably high-saving part of its economic life cycle, we can possibly have negative saving rates for the population as a whole, if we are making decisions with any attention to the amount of consumption … in the future.”

Vox Baby - The End of Personal Saving?

Despite a favorable outlook, there are at least three widely acknowledged areas of near-term concern that could pose risks to the economy going forward: a spike in energy prices, a decline in home prices, and a retrenchment in consumer spending arising from record consumer indebtedness.

The public’s increase in debt in 2005 was far greater than its increase in after-tax income.

FDIC.gov - Scenarios for the Next U.S. Recession

… research suggests that a group that includes approximately 10 percent of U.S. households may be at heightened risk of credit problems …

Not only do many borrowers in this group have pre-existing credit problems, they may also be more vulnerable than other groups to rising interest rates because of their reliance on interest-only and payment-option mortgages.

Gary North - The Next Recession

More Discussion and Information:

The Glittering Eye - Why is the savings rate so low?
Investment U - U.S. Personal Savings Rate
Bankrate.com - Savings in America: Retirement picture not as bad as it looks

Tags: personal savings, Baby Boomer, Recession

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3 Responses to “Personal Savings in Decline”

1. Mighty Bargain Hunter » Carnival of Business #2 says:
   

   […] GreatFX admits that personal savings decline is a little off-topic for a small business blog, but no doubt there will be much business opportunity for helping people with the associated problems. (And heck — it’s right on topic for this blog, so why not?) […]

   Posted May 1st, 2006 @ 12:26 am
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2. Interim Thoughts... Carnival of the Capitalists says:
   

   […] Small Business Buzz talks about Personal Savings in Decline. Is this a trend the world over? […]

   Posted May 1st, 2006 @ 10:29 am
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3. Half Sigma says:
   

   I’m as pessimistic about this economy as anyone, but I recently blogged about how the “savings rate” figure is bogus:

   http://www.halfsigma.com/2006/04/are_americans_r.html

   Posted May 1st, 2006 @ 6:09 pm
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