Spend-a-holics: Barriers or Stimulus For Economy?

This morning’s University of Michigan Survey of Consumers showed consumer confidence is the highest it’s been in three years. No one denies that America is a nation of spenders, but not everyone knows that the personal savings rate in this country has been in the red for more than 20 months now – and the last time it was negative was during the Great Depression. But is our spend-a-holic syndrome good – or bad – for our economy? Richard Yamarone of Argus Research and Joel Naroff of Commerce Bank were on “Morning Call” to give their takes on the pros and cons of American spending.

Last year’s report from the U.S. Bureau of Labor Statistics on consumer expenditures in 2004 showed consumer spending was up over 6% from the previous year (although the survey was changed in '04 so the numbers are not strictly comparable). The most significant increases in specific expenditures were food, housing, apparel and healthcare. And a quick note on personal savings in this country: as a percentage of disposable personal income, it was 8% in 1991. That number was down to –1% in 2005.

Yamarone says there’s no reason to worry – that, at least from a national income accounting standpoint, the more we spend the better. “We never really were a nation of savers,” Yamarone says. The consumer is what’s carrying the bull run on Wall Street; their spending is creating the stimulus for this market.

Naroff agrees to a point - the U.S. consumer is not only the engine of this economy, but “the engine of the world economy” as well.

So there’s a paradox, because the global economy depends on American spending – but all that spending is why we have such a low savings rate which, Naroff says, greatly reduces long-term economic growth since it raises our dependence on foreign capital to fund our economy. (Despite this, Naroff does suspect that the U.S. will move from a negative to positive savings rate this year.)

But does our non-existent savings rate really signal an economic downturn? Not necessarily, Yamarone says. First of all, as Erin Burnett points out, the way the figures are determined don’t include many forms of savings that weren’t around back in the days of the Great Depression, like IRAs. Also, the baby boomers are the first generate that really has the chance to inherit money – and a lot of that money has gone into home improvement expenditures. And owning a home is one of the largest forms of investment, and savings, Americans have.

Perhaps the real question is if our savings rate is simply mirroring a generational sea change in how Americans save, spend and view money. In an interesting survey printed in a 2002 issue of American Demographics, 47% of 18-34 year olds admitted to throwing out a penny at least once in their lives. Doesn't sound too important of a statistic, but compare that with just 11% of Americans over 65 who admitted to ever doing the same thing. Just ask any grandparent: there has been a change in the way Americans value money - whether or not that means it could hurt - or maybe help - the economy is a debate that will surely continue.