Posted by: Kevin | April 6, 2007

Spending More, Saving Less, Lets Blame Consumers!

In February of last year data was released showing that Americans had actually reached a negative savings rate.  Meaning we were spending more than we made for the first time since the Great Depression.  What’s wrong with people?  Are we so addicted to a high spending lifestyle that we’re willing to spend ourselves into bankruptcy?  It turns out the answer is a bit more complicated. 

Below is average income data going back to 1997, compared with inflation data.  Someone earning the national average in 1997, about $45K, would need to now be earning nearly $55K just to keep pace with inflation.  The current national average is only about $46K, a gap of over $8K.  By earning the national average wage, your real income (adjusted for inflation) has fallen by 15%.

income-vs-inflation.jpg
Click to expand.  If you understand this, call up you
old math teachers and thank them.  If not, please trust
me, this means inflation is kicking your ass.

This is why so many families are now dual income families, because they have to be.  This is also why so many of the working poor are working 2 or more jobs.  In every single year, starting in 2000, income has failed to keep pace with inflation.  This is true across every segment of society.  Except, those at the higher end of the income curve have alternate sources of income.  Gains on stocks and home equity have helped many in the top half of the income bracket to ride out the past few years of income stagnation. 

Unfortunately, with the housing market drying up, home equity has ceased to be an alternate source of income.  So now America’s homeowners are joining an ever growing segment of the population that is eating into its savings or living on credit.  Yet this isn’t reflected in the stock market where prices continue to rise.  That rise has fueled the growing disparity of wealth between the nation’s richest and the rest of the country. 

This is a dangerous trend that can’t last indefinitely.  At its core, our economy is about the ability of a consumer to purchase what he or she needs and wants.  While we’ve done a poor job of distinguishing between wants and needs, that isn’t enough to hurt the economy in the short term.  What can hurt the economy is for that purchasing to slow down.  Something that will happen if incomes continue to lag behind inflation and the housing boom turns to a bust. 

The current mirage of prosperity is living on borrowed time.  That we can pretend things are good now, owes to the unwillingness of most people to adjust their standard of living downward, to meet their falling income.  We must eventually reach a cash flow crisis, where the short term credit simply isn’t available to meet short term needs.  This has already been happening in the high-risk mortgage industry.  Should we reach the same point in consumer credit, the recession which marks the end of the Bush administration, will be worse than the recession which marked its beginning.
 
Annual Inflation Statistics from The US Department of Labor
US Census on Income, Poverty and Healthcare (page 47) this is a measure of wages

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