Americans saving less than nothing / Spending could outstrip income in 2005, which hasn't happened since the Depression

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When the Commerce Department recently tallied up consumer finances for November, it found that Americans shelled out more money than they took in. It was the seventh such month of red ink during 2005.

Kevin Lansing, an economist with the Federal Reserve Bank in San Francisco, tracks the personal savings rate -- the Commerce Department's measure of how much consumers have left after spending is subtracted from income. In November the savings rate was a negative 0.2 percent.

Given how much red ink households racked up in the first 11 months of last year, Lansing said the nation's personal savings rate could well be negative for all of 2005.

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That, he added, would be "the first such occurrence since the Great Depression."

The term "savings rate" may be a misnomer. Keith Leggett, senior economist with the American Bankers Association, described the measure as a tally of all the income that isn't spent.

"Savings is the absence of consumption," he said.

Traditionally this unspent income has been used to accumulate capital for future investment. By contrast, the recent spell of low savings -- or high spending -- has provided a short-term stimulus, helping the nation's output of goods and services grow at an enviable 4.3 percent rate in the third quarter of 2005.

But many experts say that in the months ahead, savings-starved, debt-burdened households will slow their spending and, with it, the economy. "You're seeing a situation where the consumers are spending every penny they possibly can and borrowing on top of that," said Joel Naroff, a Pennsylvania economic consultant, who expects growth to cool in the near future.

And while classical economic theory says savings must accumulate for future investment, if consumers suddenly start spending less, it could cause problems. "If everybody decided to save, the economy would contract and you'd lose jobs," Leggett said.

The Federal Reserve's Lansing examined the savings argument more closely in a November Federal Reserve article titled "Spendthrift Nation." He noted that in the 1980s the personal savings rate in the United States averaged 9 percent. Put another way, back then Americans spent 91 cents of every after-tax dollar they earned, which left a 9 cent surplus for savings or investment.

During the 1990s, Americans spent about 95 cents per dollar earned and had a nickel left. The nation ended 2004 with an annual savings rate of 1.8 percent. The rate has continued down through 2005, attracting the notice of some prominent economic observers.

"If we can believe the numbers, personal savings in the United States have practically disappeared," former Federal Reserve Chairman Paul Volcker wrote in an ominously titled opinion piece, "An economy on thin ice," in April.

But other economists, including current members of the Federal Reserve, say the falling savings rate isn't so alarming. They argue that the declining savings rate has been offset by another factor -- rising home prices.

"A lot of the psychology of savings is that you're prepared for an emergency," said economist Tim Kane with the Heritage Foundation in Washington. "And if your house is worth 10 percent more, then you feel you're prepared."

Federal Reserve Board member Susan Schmidt Bies painted a sanguine picture of American spending, savings and debt in an April speech. She conceded that household debt had grown twice as fast as after-tax income between 1999 and 2004, helping drive down the savings rate. But Bies noted that household net worth has soared, driven by rising home prices coupled with stock market gains.

"While analysts usually focus on the savings rate," Bies said, "some argue that a more relevant measure of savings adequacy is ... the change in net worth. And in this regard the picture of household savings looks more favorable."

In a sense, the American home has become the proverbial cake that consumers can have and eat as well, optimists say.

"Consumers want to borrow, tapping the equity they have in their homes," said Leggett, the American Bankers Association economist. "We have really figured out a way of banking to free up illiquid assets so they have greater liquidity."

But many economists say housing prices will, at best, flatten out, breaking the cycle of refinancing that has allowed consumers to borrow and spend.

"I'm afraid the home equity fountain of youth is going to dry up," said Scott Anderson, an economist with Wells Fargo. He said Freddie Mac, the giant mortgage reseller, projects that consumers will withdraw a record $200 billion in cash-out financings in 2005 -- a figure that is expected to fall to $110 billion in 2006 as mortgage rates rise.

Anderson said real earnings gains have remained more or less flat as inflation eats up wage growth. As the refinancing stimulus is removed, he foresees slower consumption in 2006. Still, he adds, "that doesn't necessarily spell doom and gloom."

Tom Schlesinger, executive director of the Financial Markets Center, a liberal Virginia think tank, is more alarmed. Schlesinger noted that the Federal Reserve's debt service ratio, which compares consumer debt payments to disposable income, hit records in each of the three quarters of 2005 for which data are available.

"Families continue to be heavily burdened by debt," he said.

Amelia Warren Tyagi, who, with her mother, Harvard law Professor Elizabeth Warren, co-authored "The Two Income Trap," said debt nowadays ensnares not just the working poor, but also middle-class families with two wage earners. Tyagi said elevated costs for mortgages, health insurance, education and day care had eroded the purchasing power of the second paycheck.

"What's happened to the family is that they have budgeted to the limit of those two incomes," she said. "If anything happens -- a job loss or an illness -- they're stuck."

Oakland homeowner Sue McCullough, 46, has experienced the pitfalls of going from two incomes down to one. In the early 1990s, she and her husband of 18 years, Don Barks, 48, both worked in St. Louis. They owned a fourplex, living in one unit and renting out the others.

When McCullough was laid off in 1991, they relocated to the Bay Area. And when she became pregnant, Barks became a stay-at-home dad.

In retrospect, McCullough, who has continued working straight through as a computer programmer, said giving up the second paycheck may have been an error. A string of bad breaks eventually caused them to lose their property in St. Louis and file for bankruptcy in 1997 in the midst of having their second child.

"I waddled into bankruptcy court seven months pregnant," said McCullough, who has since rebuilt the family's credit by getting small credit cards and then a car loan. In 2001, the family of four was able to qualify for a mortgage on a two-bedroom bungalow in Oakland's Lower Laurel neighborhood.

"I am really careful, as in obsessive," said McCullough, a self-described skinflint when it comes to debt and spending. "We hit bottom and then things started to get better."