Americans May Finally Be Tapped Out

For close to two years now, Americans collectively have been spending more than they earn. The personal savings rate went below zero in the second quarter of 2005 and has remained negative ever since.

The most recent figures from the Commerce Department show that the trend has continued, with personal saving as a percentage of disposable personal income at -0.8 percent for March.

Before 2005, the last time the savings rate was negative for an entire year was during the Great Depression. (See graph of personal savings rate from Commerce department here.)

If you've been schooled in the ant and the grasshopper fable, this would seem to be a bad thing. What about the future? What of the inherent virtue of thrift?

A negative savings rate conjures up images of careless consumption, heedless indulgence in flat-screen TVs and cruises to Alaska, but in fact Americans may not be so irresponsible as that.

Because the savings-rate figure doesn't take into account previously accumulated wealth or unrealized gains in investments, its implications may be distorted.

Americans may have become comfortable spending all their income and then some because they had already put away plenty and could afford it, or because knew they had some major assets that had appreciated wildly over the past five years--like, say, their homes.

When interest rates were lower and housing markets frothy, homeowners didn't hesitate to fuel their consumption with home-equity loans.

But that, as the Wall Street Journal recently pointed out, has changed: Demand for home-equity credit has leveled off, and lenders have become pickier in the wake of the troubles in the subprime-mortgage industry.

Now, as David Rupp, a Bank of America home-equity executive, is quoted as saying, consumers "view themselves as not needing to borrow."

Does this mean Americans are having second thoughts about their recent shopping spree? Perhaps because consumer spending had been buoying the economy at the end of 2006, optimistic commentators were eager to dismiss the relevance of the negative spending rate and saw no particular reason to expect the consumption to end.

But according to Redbook Research's retail sales report released last week, sales at U.S. chain stores fell 4.1 percent in the first three weeks of April compared with the previous month. And recent disappointments in auto sales suggest Americans may have finally decided that they are tapped out.

by Robert Horning