Are Consumers Spending Too Much?
July 6, 1999
The latest data on personal income and expenditures show that in May income rose by 0.3 percent and spending rose by 0.6 percent, resulting in a negative saving rate. Consumers spent $77.1 billion more than their disposable income would ordinarily allow by drawing down previous saving, selling assets such as stocks, and by going into debt. Since January, consumers have reduced their saving by $274 billion.
Although Americans are saving less out of their paychecks, their net worth has risen from a climbing stock market. According to the Federal Reserve, last year gross household assets rose nearly $4 trillion, but liabilities rose by just $500 billion, for a rise in net worth of $3.5 trillion.
Personal saving is just part of gross national saving, and saving by businesses and governments is more important. Since the budget surplus adds to national saving, consumers really should get credit for this year's estimated $99 billion federal budget surplus. After all, the higher taxes they pay are responsible for it.
Purchases of durable goods, such as autos and home appliances, are really a form of saving since such assets will last for many years. Indeed, the Federal Reserve includes consumer durables in its measure of household saving, which the Commerce Department does not.
In recent years, durable goods purchases have grown significantly as a share of consumer spending.
- In 1980, such goods were 9.4 percent of all personal consumption expenditures; last year they rose to 14.3 percent.
- In May, while total spending rose by 0.6 percent, durable goods purchases increased by 2.5 percent -- four times faster.
One explanation for rising durable goods expenditures may be the increasing importance of computers in homes, where they enhance household efficiency just as they contribute to business productivity.
Source: Bruce Bartlett, senior fellow, National Center for Policy Analysis, July 5, 1999.
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