Americans' savings rate hits lowest level since the Great Depression

~ The savings rate has been negative for an entire year only twice before, in 1932 and 1933.

WASHINGTON -- Americans spent more than they made last year -- something they haven't done since the Great Depression, a time of massive unemployment and soup lines.

This time the trigger was good economic news -- a booming housing market, which has made millions of American homeowners feel wealthier and thus more willing to spend with abandon.

Government statistics released Monday showed they may have gone overboard with all of that spending, consuming all their after-tax income and then some.

The Commerce Department reported Monday that Americans' personal savings rate fell into negative territory, minus 0.5 percent, last year. That means people spent all their after-tax income and then had to dip into previous savings or borrow more to finance their consumption.

The savings rate has been negative for an entire year only twice before, in 1932 and 1933 -- two years when Americans were having to deplete savings to cope with the massive job layoffs and business failures caused by the Great Depression.

Feeling wealthier

Now, soaring home prices are making people feel wealthier. But this behavior could be risky at a time when 78 million Americans are on the verge of retirement. The baby boomers start turning 60 this year, which means they can begin retiring with Social Security in just two more years.

With this huge wave of pending retirements, analysts said, the savings rate should be going up rather than being on a steady decline over the past two decades. The savings rate stood at 10.8 percent of after-tax incomes in 1984 and has been declining steadily since that time. It was down to 1.8 percent in 2004 before turning negative last year.

Little saving going on

"Americans seem to have the feeling that it is wimpish to save," said David Wyss, chief economist at Standard & Poor's in New York. "The idea is to put away money for old age and we are just not doing that."

Analysts said rising home prices and a rebound in stock prices following the 2000 market collapse have many Americans feeling wealthier, and that effect is a major pillar supporting consumer spending.

"Americans have been content to spend a lot more than is good for them or for the economy," said Lyle Gramley, senior economic adviser at Schwab Washington Research Group.

On Wall Street, the Dow Jones industrial average dipped 7.29 points on Monday to close at 10,899.02.

After setting records for five straight years, sales of both existing and new homes are expected to decline this year under the impact of rising mortgage rates. The weaker sales will translate into slower price appreciation, which in turn will slow consumer spending, analysts are forecasting.

That slowdown in spending should help the savings rate rise back into positive territory.

But analysts are not expecting sizable improvements in savings, because as baby boomers begin to retire they will start tapping into their savings to pay for medical bills and other consumption.

The expected slowdown in consumer spending is one reason many economists are looking for overall economic growth to slow further this year. The gross domestic product grew 3.5 percent last year, down from a five-year high of 4.2 percent in 2004.

The Federal Reserve, trying to engineer a slowdown in growth that will keep inflation under control, is expected to boost interest rates for a 14th time at its Tuesday meeting.

A price gauge closely watched by the Fed that excludes food and energy rose by a tiny 0.1 percent in December, down from a 0.2 percent rise in November, the Commerce Department reported Monday.

For December, consumer spending rose by a bigger-than-expected 0.9 percent while incomes were up by just 0.4 percent. That forced the savings rate for the month down to a negative 0.7 percent.

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On the Net

* Consumer spending and incomes: www.bea.gov