Over the last three months, average real income (the amount that income rises taking out the natural upward-trend in prices) rose 1.5% per year, while average real consumption rose 1.75%. The math is simple: saving must be falling. In fact, since the late 1980s, personal saving has been on a downward spiral. In order to eat at the same restaurants, drive the same car, buy the same groceries, insurance, furniture, appliances, entertainment, and vacations, Americans are saving an almost-zero share of their disposable income.
However, this is just one measure of saving. Saving measured on a national, or even international, scale tells a different story. It is important to understand that
Investment must be included in national saving because it is an important determinant of future economic growth. As a nation, Economists include buildings, computers, and machinery in the definition of saving because when they are built (it takes time), income rises with higher production, and the country is better off. Government saving/dissaving must also be included. When the government issues a bond in order to pay for a public service or program (ex: universal health care) that is not covered by regular tax receipts, American tax-payers must pay off the debt in the future. National saving falls and brings future economic growth with it.
As a nation, national saving has fallen with rising government deficit spending, but is being sustained by firm investment and sits at 13% of total income (GDP). When compared to the personal saving rate (0.7%), national saving (13%) is not so alarming. Firms (and the government) are building up the infrastructure of the economy, which will produce higher economic growth in the future.
We are not out of the woods yet
The current account is the most troubling of all saving measures. Fact is fact: American consumers are big spenders and currently borrowing from the rest of the world in order to keep the spending going.
There are arguments as to why the current account is not really as bad as it seems; perhaps this is worth a future blog entry. However, the light at the end of the tunnel is still shining with all the umph of a 40-watt light bulb. The falling value of the U.S. dollar is good for the current account. Exports rise relative to imports, and
So there is hope yet. The correction of the current account is a natural economic process. It is okay to keep consumption steady, but not at the cost of becoming increasingly indebted to the rest of the world. Further, it is always good to remember that the saving rate reported in the media is only a small part of the whole story.