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Jim Lentini: What's the biggest threat to the economy?

Business Commentary

Posted: June 29, 2010 4:55 a.m.
Updated: June 29, 2010 4:55 a.m.

A article in Newsweek's business section in 2007 questioned a major problem that is a threat to our economy. It started by addressing the mortgage problem that was surfacing at that time, and alluded to what was a bigger threat to the economy than the mortgage problem. The statistics quoted started with the following question: What is the biggest threat to the U.S. economy?

* Higher oil prices

* A prolonged housing slump

* A steep rise in personal savings

* A big hedge-fund failure

If you picked savings, you made the right choice. For 25 years, Americans have been on a collective shopping spree, aided by a historic collapse of the personal-savings rate. In the early 1980s, U.S. consumers saved about 10 percent of their after-tax income. By 2005, the savings rate dropped to zero. A rapid rebound in savings could be devastating. Consider this: Americans spend about $10 trillion (with a capital "T") each year. A jump in savings rate to 5 percent would cut that by a massive $500 billion.

People save to buy a home, put kids through college and protect their retirement. By saving, nations lift their living standards through investments in new technologies, more factories and roads. Still, the collapse of personal savings has clearly bolstered the economy.

This spending by Americans has served as an afterburner as they spend more of their incomes or borrowed more. Since 2000, consumer debt, including mortgages, has increased a hefty 82 percent to $13.4 trillion. The resulting stimulus to production and job creation has largely insulated the economy from repeated setbacks, from the puncturing of the high-tech "bubble," to higher gasoline prices, to big hedge-fund failures and the current housing slump (remember, these stats are from 2007).

The afterburner may become a drag chute. The stats are staggering. Although this spending has increased wealth (assets/liabilities) to substitute savings, it may now be abating. Home prices are now flattening or dropping. Lax credit standards and low interest rates also contributed to consumer's recent borrowing surge. Both are now ending (hence, this was followed by the collapse of the housing and financial market in 2008).

Put it all together, and tireless American shoppers may be tiring. Shoppers may feel impelled to save more and buy less, especially as aging baby boomers contemplate their retirement. Monthly interest and principal payments now exceed 14 percent of disposable income - near a historic high.

Most economists, interestingly, seem unperturbed. They discount the danger of a big shift in consumer spending and saving.

But then, most economists didn't anticipate the earlier fall in personal savings. If they're not right, watch out. Are you reducing debt and saving enough?

This was written in 2007, and the financial market problem of 2008 added to the negative statistics quoted in 2007. As our nation now is struggling to restore finances, jobs and values lost, we now have government deficit spending and impending taxes to make recovery more difficult.

In May, 2010, it was published by the Bureau of Economic Analysis that the personal savings rate in the U. S. was 1.7 percent in August 2008 (just before the 2008 global financial crisis), rose to 6.2 percent in May 2009 but has now fallen back to 3.6 percent in April 2010.

Hopefully Congress will realize the problem, stop politicizing economic decisions and reduce government costs. That way, we can start to rebuild the economy, create jobs and save money.

Jim Lentini, CLU, ChFC, IAR is president of Lentini Insurance & Investments Inc. His column reflects his own views and not necessarily those of The Signal.


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