South-Western College Publishing - Economics  
Savings in the Red - Again
Subject Economic growth
Topic Productivity and Growth
Key Words Personal Income, Savings Rate
News Story

Americans are still shopping! The Commerce Department reported that personal income rose 0.5 percent in February to an annual rate of $7.36 trillion. With personal income and stock prices continuing to rise, consumer spending rose 0.7 percent in February - an increase that exceeded current disposable income - making the personal savings rate negative.

For the fourth time in the last six months, the increase in consumer spending exceeded after-tax income. Consumers apparently dipped into savings or cashed some assets to cover their expenditures. Economic growth consistent with this level of spending might be as high as 5 percent. Given the economy's 6.0 percent growth for the fourth quarter, there is little evidence that the economy is slowing. Except for oil prices, inflation still appears to be in check. The Commerce Department reported that the price of goods and services were up only 1 percent in the past 12 months.

The National Association of Purchasing Management provided some evidence that the nation's manufacturing sector was recovering from its recent decline. The Association reported that its monthly index for conditions in the manufacturing sector rose to 54.3 percent form a 52.4 percent level in February. An index value above 50 means that economic activity in manufacturing is expanding. The Commerce Department also reported that the value of construction put in place in February was 2 percent higher than the January level. This figure is 11 percent higher than the value for February of last year.

(Updated June 1, 1999)

1. The article points out that economic growth will be greater than the 2.5 percent growth rate that was previously forecast. Why might the Federal Reserve express concern with this revision?
2. What would be the likely reaction of the Federal Reserve if they believed the growth rate was too high?
3. Define the personal savings rate. Can the personal savings rate be negative?
Source John M. Berry, "Consumers Again Boost Spending", The Washington Post, April 2, 1999.

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