People once again spent everything they made and then some last year, pushing the personal savings rate to the lowest level since the Great Depression more than seven decades ago.
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The Commerce Department reported that the savings rate for all of 2006 was a NEGATIVE 1 percent, meaning that not only did people spend all the money they earned but they also dipped into savings or increased borrowing to finance purchases. The 2006 figure was lower than a negative 0.4 percent in 2005 and was the poorest showing since a negative 1.5 percent savings rate in 1933 during the Depression.
For December, consumer spending rose a solid 0.7 percent, the best showing in five months, while incomes rose by 0.5 percent, both figures matching Wall Street expectations.
In other news, a key gauge of factory activity flashed recession warnings in manufacturing in January.
The Institute for Supply Management said its manufacturing index registered 49.3 last month, down from a December reading of 51.4. A reading below 50 indicates that manufacturing activity is contracting rather than expanding.
Meanwhile, the Labor Department reported that the number of newly laid off workers filing claims for unemployment benefits dropped by 20,000 last week to 307,000. That improvement pushed the four-week average for claims to the lowest level in a year, indicating that the labor market remains healthy.
The savings rate has been negative for an entire year only four times in history — in 2005 and 2006 and in 1933 and 1932. However, the reasons for the decline in the savings rate were vastly different during the two periods.
During the Great Depression, when one-fourth of the labor force was without a job, people dipped into savings in an effort to meet the basic necessities of shelter and clothing.
Economists have put forward various reasons to explain the current lack of savings. These range from a feeling on the part of some people that they do not need to save because of the run-up in their investments such as homes and stock portfolios to an effort by many middle-class wage earners to maintain their current lifestyles even though their wage gains have been depressed by the effects of global competition.
Whatever the reason for the low savings, economists warn that it the phenomenon exists at a particularly bad time with 78 million baby boomers approaching retirement age. Instead of building up savings to use during retirement, baby boomers are continuing to spend all their earnings.
"These low savings levels are coming right as baby boomers are starting to retire and after your retire, your savings rate typically goes down as you live off previous savings," said David Wyss, chief economist at Standard & Poor's in New York.
The savings rate is computed by taking the amount of personal income left after taxes are paid, an amount known as disposable income, and subtracting the amount of spending. Since the figure has dipped into negative territory, it means consumers are spending all of disposable income and then some.
For December, the savings rate edged down to a negative 1.2 percent, compared to a negative 1 percent in November. The savings rate has been in negative territory for 21 consecutive months.
The 0.7 percent rise in personal spending was the best showing since a similar gain in July. It followed increases of 0.5 percent in November and 0.3 percent in October and reflected solid spending by consumers during the Christmas shopping season.
Consumer spending posted a solid rebound in the final three months of the year, helping to lift overall economic growth to a rate of 3.5 percent during that period, up significantly after lackluster growth rates in the spring and fall.
Incomes were up 0.5 percent in December, the best showing since a similar increase in September.
On the inflation front, a gauge tied to consumer spending that is preferred by the Federal Reserve edged up by 0.1 percent in December. This gauge, which excludes volatile food and energy prices, was up 2.2 percent over the past 12 months ending in December, still above the Fed's comfort zone of 1 percent to 2 percent.
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