Big Spenders And Big Savers

Economists spy an inconsistency

With consumption so strong lately, you might think consumers have been throwing caution to the winds and putting less away for a rainy day. In fact, Commerce Dept. statistics show that the personal savings rate has been moving up since 1994 (chart) and recently hit a four-year high.

This picture of buoyant spending accompanied by stronger savings may well have played a part in the Federal Reserve's decision to push up interest rates. It suggests that, whatever the debt woes of some groups, consumers overall are in good shape to keep on spending briskly--and even dip into savings if something strikes their fancy.

Several economists, however, think the evidence that consumers are squirreling away more cash is questionable. The object of their disaffection is the conventional personal savings rate, which is derived from Commerce Dept. data. Because it is a "residual"--that is, calculated by subtracting consumption from aftertax income and doesn't directly measure anything--this rate can be highly unreliable, argues Bruce Steinberg of Merrill Lynch & Co.

Steinberg's preferred measure is one derived from the Fed's "flow of funds" data. Based on actual financial flows, this savings rate, which usually moves in the same direction as the Commerce Dept. measure, has been trending down since 1992--and touched a record low in the second half of last year.

David A. Levy of the Jerome Levy Economics Institute thinks that overstated savings help explain the recent rise in the so-called statistical discrepancy--the gap between income and output measures of the economy (BW--Dec. 30). "The true savings rate is probably down sharply," he says.

Both economists believe that the real spur to consumer spending over the past year has been a sizable "wealth effect" resulting from the stock market's bull run in 1994-96. With savings low and spending keyed so much to financial wealth, the risk, says Steinberg, is that "consumers may turn out to be a lot more sensitive to falling stock prices than they were to rising ones."

If he's right, Fed tightening could cause a far more severe retrenchment than the Fed has been anticipating.

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