In an Associated Press report (available here), Martin Crutsinger reports that people in the U.S. “are saving at the lowest level since the Great Depression.” For the second straight year, the savings rate is negative, meaning people are spending more than they earn. Last year (2006) the rate was -1.0%, and in 2005 it was -0.4%. According to the report, there were only two other years in U.S. history with a negative savings rate, and both occurred during the Great Depression (1932 & 1933).

The report claims two factors are particularly significant in influencing the rate. The first claim is that it is due to positive economic developments tied to low interest rates that spurred mortgage loan refinancing which allowed people to use “higher home values to get money to spend on other things.” The second claim is that it is due to rising income inequality. According to the report:

The rich, who traditionally save the most, don’t feel the need to save as much any more because their net worth has been soaring with fatter paychecks for those at the upper levels of the income scale. They have also benefited from a rebounding stock market.

“Wealthy individuals have become very wealthy and they now have a larger nest egg and therefore they are spending more of their current income than they have historically,” said Mark Zandi, chief economist at Moody’s Economy.com.

For the past 25 years or so the savings rate has declined dramatically from a high in 1982 of 11.2% to the 2006 rate of -1.0% (for a graph, see “Personal Saving Rate Has Declined” at the U.S. Government Accountability Office). For more economic analysis of possible consequences of the declining savings rate, see the “FRBSF Economic Letter” (dated November 10, 2005) at the Federal Reserve Bank of San Francisco.

FYI, according to the report: “ The savings rate is computed by taking the amount of personal income left after taxes are paid, an amount known as disposable income, and subtracting the amount of people’s spending.”

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