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September 29, 2000

August Spending Outruns Income: Consumption Shoves Savings Rate To All-Time Low
By Rachel Koning,

Rate Hikes Have Not Slowed Spending ... Weiss comments

WASHINGTON - Americans dipped into savings or ran up their credit cards to fund their spending in August, data from the Commerce Department released Friday showed.

Personal spending, at a 0.6% increase, topped a 0.4% rise in incomes last month. That means consumers used resources other than their paychecks, interest income or rental collections to satisfy their needs and wants.

A survey of economists called for a 0.5% rise in spending and a 0.3% increase in incomes during August.

Figures for July showed a 0.3% rise in income and a 0.6% rise in spending.

Consequently, the level of savings -- at a negative $25.4 billion in August -- is the lowest on record. Savings as a percentage of income registered at a negative 0.4%, also the lowest since the government began collecting these statistics in 1959.

A zero or negative savings level occurs when consumer outlays are financed by borrowing such as through credit cards, home equity loans and selling investments, or when previous savings are tapped.

Part of the higher spending was owed to rising oil costs, which hit at the gas pumps and elsewhere.

Financial markets, however, are focusing on what the Fed says about demand and a still-tight labor market in comments typically issued at the close of meetings. The field of economists is about equally divided between those who believe the Fed can start thinking about lowering interest rates early next year and those who believe the Fed will keep a bias toward fighting inflation, although with rates probably on hold through the end of the year.

Still, consumers were willing to spend more on big-ticket items in August, the report details. Spending on durable goods -- more expensive items such as cars and appliances meant to last at least three years -- rose 1.6%. That increase is the largest since February, a Commerce official confirmed.

The Federal Reserve has raised rates 6 times since June 1999. The last rate hike, in May 2000, hasn't stopped the out-of-control spending that has swept the U.S. in the past few years. Still, consumer confidence remains near historic highs even as the savings rate reaches new lows.

Worse, consumers continue to dig themselves deeper into debt in order to make purchases. But a negative savings rate is not a positive for the strength of the U.S. economy. The U.S. economy is already vulnerable to an enormous trade deficit. If the U.S. dollar weakens, foreign investors will dump their holdings of US dollar denominated securities. That could lead to disastrous consequences for the US stock and bond markets. Consumers, already vulnerable, will really get whacked.

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