South-Western College Publishing - Economics  
Savings Go South
Subject Aggregate Expenditure
Topic Productivity and Growth
Key Words Savings, Wealth Effect, Personal Income, Disposable Income, Capital Growth
News Story

The savings rate, the share of disposable personal income left after spending, has been falling for years in the United States. September figures reveal that the savings rate was negative for the first time since 1959. A negative savings rate means that Americans spent more than their after-tax incomes - spending increased by 0.5 percent from its August value compared with a 0.2 percent increase in personal income. The negative savings rate coupled with decreasing consumer confidence have caused some analysts to predict a slowing in economic growth in the next few months.

Savings are defined as the difference between income and spending, and disposable income, according to the definition used by the Commerce Department, does not include the change in wealth that results from increases in the value of stocks or other assets. The substantial increase in the value of stocks over the last several years produced capital gains and encouraged consumers to increase their spending. This process, called the wealth effect, reduced a U.S. savings rate that was considered low in comparison to other countries even before the stock market run-up.

The wealth effect, however, works in both directions. The recent decrease in stock market prices that resulted in a $1.5 trillion reduction in wealth, has led many analysts to predict that consumer spending will weaken in the coming months. The National Association of Purchasing Management provided additional evidence of a weakening economy. The NAPM reported that its monthly survey showed a decrease of manufacturing activity for the fifth month in a row. Manufacturing has also been affected by the weakness in the Asian economies.

(Updated December 1, 1998)
Questions

1. How is the savings rate defined?
2. What is the difference between the marginal propensity to save and the average propensity to save?
3. Why is a low savings rate considered to be a problem?

Source John M. Berry, "Savings Rate Hits Negative Territory", The Washington Post, November 3, 1998.

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