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US CONSUMERS: Spend, spend, spend

FT Lex NOVEMBER 9 1998

America's profligate consumers have excelled themselves. September's household savings rate fell to minus 0.2 per cent, the first time it has been negative since records began in 1959.

In the short term, this is not necessarily worrying. A negative savings rate means consumers are financing purchases either through borrowing or by dipping into past savings. There is headroom on both fronts.

US consumers are not, in fact, as heavily indebted as is often assumed. Gross household debt as a percentage of personal incomes stands at 98 per cent in the US against around 110 per cent in the UK. More important, the level of personal savings is currently very high, due to the stock market wealth effect.

At the end of June, US households held around $8,500bn worth of equities (directly and through mutual funds), equivalent to the country's entire gross domestic product. A low or negative savings rate is thus possible for quite some time. It even boosts economic growth - witness the US consumer boom of the past few years.

Over time, however, spending more than you earn is unsustainable. Eventually, that would exhaust your stock of savings and lead to bankruptcy. In practice, of course, not all of those savings are available to be spent in the first place. In an ageing society like the US, savings should be growing at least as fast as inflation plus nominal GDP to protect living standards in retirement. In recent years, they have comfortably exceeded that, thanks largely to the stock market.

But this does highlight US consumers' reliance on continued capital gains. Were those to shrink or disappear, the snapback in the savings rate could be dramatic, with dire consequences for consumer spending and economic growth.

FT:s GERARD BAKER: Little saving grace for the US

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