No, but overconsumption is a huge problem.
It seems like a great paradox. How can the financial
advice business be doing so well when it is faced with a nightmare
scenario-an American public that is no longer saving. According to
Department of Commerce figures released in June, the U.S. savings rate,
which has been on the decline for years, fell to zero.
Taken on its face, the milestone means that Americans are spending money just as swiftly as it comes in, living paycheck to paycheck, and giving themselves little or no wiggle room to meet unexpected expenses.
In reality, however, the numbers provide more of a rough measure of how Americans are saving. The savings rate is basically personal saving as a percentage of personal income-disposable income subtracted by national expenditures-with disposable income representing what is left after spending and tax payments are subtracted. The formula does not include capital gains and investments in pension plans. And most financial advisors work with that small segment of the population that continues to save.
Yet economists say the figure still has its uses, and is at least an indicator that Americans should be saving more than they are. "As a relative measure of savings, I think it's a clear indication that people are being pressed to the wall," says economist Joel Naroff of Naroff Economic Advisors in Holland, Pa. "You have to come to at least some judgment that people are drawing down on their savings in order to sustain their lifestyles as best as they can. That raises the question, 'How long can that continue?'"
They also note that the figures indicate that there has been a trend toward less saving over the years. "Historically, they didn't change the way that number is calculated," said D. R. Barton, a trader, co-chair of the Investment U financial education service and co-author of Safe Strategies for Financial Freedom. "As a trend, Americans are definitely saving less."
Barton says there are a number of reasons why this should be a concern. On a grassroots level, he says, Americans are living with very little margin for error, and are vulnerable to going into deeper debt. "We are kind of living on the edge when we stop saving as individuals," he says.
While the savings rate doesn't account for retirement savings or capital gains, the appreciation of a stock portfolio or a home is usually of little help when immediate expenses crop up, he says. Plus, many Americans don't invest in stocks.
On a national level, the low savings rate means that a larger portion of the nation's debt is being picked up by foreigners in the form of bonds. That also could eventually impact consumer spending, he says.
"Individual households can't keep up that deficit spending very long," Barton says. "The first ripple effect would hit the retail sector-people would spend less and less on luxury items and retail spending would go down."
Naroff feels consumer spending is the area that could have the most impact on the economy. "I don't worry so much about the foreigners owning our debt. What I worry about is whether we hit a point where people say, "Enough,'" he says.
With energy prices on the rise, he says, consumers could reach that point surprisingly fast. "That's the second shoe falling, and when it does fall, and it will, no question about it at this point: they are simply going to say, 'Enough,'" he says.
Not everyone is convinced the Commerce Department's savings rate is a serious concern. Zvi Bodie, professor of finance at Boston University School of Management, says that the more important figure is the aggregate savings rate that includes savings by government and business, which has decreased less drastically than personal savings.
Another factor is that business savings, coming primarily out of corporate profits, has been rising in recent years. "The U.S. is saving significantly more than in the decades of the '50s, '60s and '70s," Bodie says.
As for the amount of U.S. debt held by foreigners, Bodie feels it is of little consequence. "Why in the world should I be concerned about that?" he asks. "The foreigners should be concerned about that."
He also notes that there's a flip side to the savings rate: More savings means less dollars put into the economy.
"Saving more from the same amount of income means spending less on consumption," he says. "The nature of things is, if you solve one problem, you create others."