A Rocky Mountain News editorial about the U.S. economy misleadingly used figures on consumer consumption to challenge the argument that incomes for many Americans have stagnated. The News failed to mention that declining savings, and not higher incomes, may have contributed to the growth in consumption.
In a December 31 editorial, the Rocky Mountain News misleadingly cited consumption statistics to dispute the argument "that incomes for many or even most Americans ... have been stagnant for a quarter century or more and that the benefits of economic growth have been confined to those with high incomes." While income growth might support increased consumption, the News failed to note that government figures suggest recent consumption growth may in fact also have been fueled by declining saving: Since April 2005, Americans have recorded 20 straight months of negative savings rates -- spending more than they have received in after-tax income.
The News had stated as its "main wish for 2007... that the newly ascendant Democrats [who in 2006 won majorities in the U.S. Senate and House of Representatives] remember that the single most important anti-poverty program remains strong economic growth" and argued against "policies that could starve the golden goose of growth." The News quoted an essay by Cato Institute Senior Fellow Alan Reynolds -- published March 30, 2006, on the "conservative web community" Townhall.com -- to support the editorial's suggestion that increased consumer spending corresponds with increased income:
From the December 31, 2006, Rocky Mountain News editorial, "Iraq aside, 2006 was a solid year":
Indeed, our main wish for 2007 -- other than the obvious one of seeing the violence abate in Iraq so that U.S. troops can begin to come home -- is that the newly ascendant Democrats remember that the single most important anti-poverty program remains strong economic growth.
Unfortunately, it has become fashionable to argue that incomes for many or even most Americans (the charge varies in its extravagance) have been stagnant for a quarter century or more and that the benefits of economic growth have been confined to those with high incomes. But this claim is implausible on its face to anyone who considers the tremendous increase in consumption over that period (as measured in average home size, proliferation of household appliances, foreign travel, etc.) and the unassailable fact that this consumption is by no means confined to the upper class.
Economist Alan Reynolds confirms this impression with hard data: "Real consumption per person rose from $14,816 in 1980 (in 2000 dollars) to $25,816 in 2004 -- an unprecedented gain of 74.2 percent."
The News did not note that a decline in personal saving, which has freed money for consumption, has been taking place for decades. In an October 2004 speech, former Federal Reserve Board Vice Chairman Roger W. Ferguson Jr. noted that "[s]ince the early 1980s, the personal saving rate has fallen steadily; on average, a household today saves only about 1-1/2 percent of its disposable income, compared with about 11 percent in 1984." As CNNMoney.com reported on December 21, 2006, the personal saving rate has declined further since Ferguson's speech and has been negative every month since April 2005, meaning "American consumers are spending more than they're taking home after taxes." According to the article, "The savings rate compares after-tax income to the money spent on a wide range of items. It turns negative when people take on additional debt such as home equity loans or other credit, or sell assets, so they can spend more than their take-home pay."
The U.S. Bureau of Economic Analysis maintains a chart displaying the personal saving rate by quarter since 2000, when the personal saving rate for the year was about 2 percent of disposable income.
A November 2005 report from the Federal Reserve Bank of San Francisco explained the "decades-long decline in the U.S. personal saving rate" as "largely a behavioral response to long-lived bull markets in stocks and housing together with falling nominal interest rates over the same period." The report continued:
Since 2000, the rate of residential property appreciation has been more than double the growth rate of personal disposable income. In many areas of the country, the ratio of house prices to rents (a valuation measure analogous to the price-earnings ratio for stocks) is at an all-time high, raising concerns about a housing bubble. Reminiscent of the widespread margin purchases by unsophisticated investors during the stock market mania of the late-1990s, today's housing market is characterized by an influx of new buyers, record transaction volume, and a growing number of property acquisitions financed almost entirely with borrowed money.
As the News itself reported on September 13 ("A gloomy 2007 forecast: Economist Adams predicts recession as spending slows"), some economists are concerned that unsustainable deficit household spending might be cut short by a decline in the housing market and lead to a recession:
Economist Tucker Hart Adams delivered one of her signature gloom-and-doom scenarios Tuesday, predicting a recession would begin next year as consumers become nervous about their finances and put the brakes on spending.
With many consumers saving nothing and borrowing a lot, a potential drop in home prices could cause "the whole house of cards to come tumbling down," the veteran watcher of Colorado's economy wrote in her 2007 forecast.
Already, rising interest rates threaten to push up mortgage payments to levels that could force consumers to rein in purchases. Without home price appreciation to count on, consumer confidence would also slide.
"Recessions occur that way ... when consumers cut back," Adams said at an annual downtown breakfast for U.S. Bank customers.