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American Savings Lowest Since Depression MoneyNews
(Headlines - scroll down for full stories) 1. American Savings Lowest Since Depression Spendthrift Americans aren't doing themselves any favors these days. In fact, the U.S. savings rate is in negative territory – at its lowest level since the Great Depression. The Commerce Department reports that the average U.S. household didn't save so much as a penny last year, as Americans either accumulated more debt or dug into the savings they had to pay bills and buy goods.
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On average, Americans used 0.5% of their savings to help keep their finances in the black in 2005. "The savings rate in the United States hasn't been this low since the Great Depression," said a Tuesday editorial in the Cincinnati Enquirer. "But back in 1932 and 1933, unemployment was rampant, and many families had to break the piggy bank just to keep food on the table. This time, the analysts are saying, Americans seem to be spending money they don't have just to maintain a lifestyle to which they've become accustomed." But the Associated Press describes the situation in a decidedly harsher manner, saying that "Americans seem to have the feeling that it is wimpish to save." The Enquirer reports that the low savings rate may be a result of Americans not having enough money to meet their ongoing financial obligations. According to the Washington-based Center on Budget and Policy Priorities, during the past 20 years the gap between the wealthiest 20% of Americans and everyone else has expanded significantly. "The biggest cause of rising income inequality over the past two decades has been the erosion of wages for the 70% of workers with less than a college education," the report states. But even white-collar workers aren't immune. "More recently, even college-educated workers have experienced real declines in wages, in part because of offshore competition." It all spells trouble for the U.S. economy, as two-thirds of gross domestic product are influenced by consumer spending. "Regardless of the reason, the failure of Americans to put even a little money away is going to spell trouble, if for no other reason than the fact that nearly 80 million Baby Boomers are turning 60 this year and many of them are heading toward retirement with nothing to live on but Social Security," says The Enquirer. Congress could help by stabilizing Social Security and working to bring soaring health-care costs back to earth. But the bulk of the burden falls on real Americans, the paper says. "If you are so inclined, your best bet is probably the tried and true. Live within your means, put a little bit away each week and invest it prudently. That way, when it comes time to pay for college or retirement or the fix for the leaking roof, you might not have to reach for the credit card." Editor's Note:
2. Bush Pushes Fed to the Right While newly minted U.S. Supreme Court Justice Samuel Alito has earned the bulk of media coverage, new Federal Reserve Chairman Ben Bernanke is now ensconced at the Fed, operating under the radar so far. But it's the Fed, and not just the Supreme Court, that is tilting more to the political right these days, argues Larry Kudlow, writing in National Review Online. "President Bush has famously changed the composition of the Supreme Court with the appointments of judges John Roberts and Samuel Alito, two big conservative victories," writes Kudlow. "But equally interesting is the president's overhaul of the Federal Reserve, which becomes the 'Bernanke Fed' with the retirement of Alan Greenspan this week. While the Supreme Court has loudly gone right, our central bank is quietly doing the same." Kudlow points to a pair of new central bank appointments made by President Bush last week. Kevin Warsh and Randall Kroszner were tapped to fill two vacancies on the Fed's Board of Governors. "Warsh is a current White House economic adviser and a former Morgan Stanley investment banker," says Kudlow. "Kroszner is the University of Chicago economics professor who served on the Council of Economic Advisers during Bush's first term. The two nominees are tried and true free-market, low-tax, deregulation-inclined policy advisers." Two previous Bush appointees to the Fed – Susan Bies, a former Tennessee banker, and Mark Olson, formerly with Ernst & Young and U.S. Bancorp and a legislative assistant to former Republican congressman Bill Frenzel of Minnesota – have pushed the Fed further to the right, adds Kudlow. "All told, Bush has appointed six of the seven current board members – an incredible turnover. While they are not all supply-siders (Donald Kohn is more of a traditional Washington Keynesian, while Roger Ferguson is a Clinton-era carryover), I would say this Fed board is at the margin much more supply-side – in terms of an allegiance to low taxes and regulations – than prior boards." Kudlow continues: "Adding together the shifts to the Supreme Court and the Federal Reserve, it could be argued that the policy organs that hold sway over the judicial and monetary influences on business are more free-market, Reaganesque and pro-growth than anything we've seen in a long time." That should create a Federal Reserve that will be more open to free-enterprise growth and less biased toward higher taxes and stricter economic regulations. "With a firm monetary foundation, Reagan-like policies of low tax rates and free-market deregulation will afford American entrepreneurs the freedom and rewards that are necessary to maximize economic growth," concludes Kudlow. "Without question, the private sector must be liberated so it can effectively function as the engine of prosperity. This capitalist model was restored and rejuvenated by President Reagan 25 years ago and its success has been copied worldwide. Bush's appointments to the Fed and the Supreme Court are the latest testament to this." Editor's Note:
3. Homes Sales Slide for Fourth Straight Month According to Bloomberg today, deals to buy U.S. homes slid for the fourth straight month, according to December 2005 numbers from the National Association of Realtors (NAR). For the month, home purchase agreements and pending home resale numbers fell to 116.4%, down from 120%, according to the NAR benchmark index. Home prices were "too rich for some buyers," says Bloomberg. And the news service says that the five-year boom in the U.S. housing market is likely over. "Economists predict a slowdown in sales in 2006, suggesting housing will contribute less to economic growth." The news service cites sources that say the decline in American home sales is a trend that should continue well into 2006. "The housing market's going to continue to soften until prices get back in line with incomes," Nariman Behravesh, chief economist at Global Insight Inc., told Bloomberg. "That means less of a contribution to gross domestic product and less support for consumer spending." The NAR index for 2005 rose to 124.4%, up from 120.9% in 2004. The index's base value of 100% represents the 2001 U.S. home sales average, the group says in its monthly home sales report. As is usual with housing numbers, the story is different from region to region. "The pending resales index increased in two of the four regions compared with the prior month," says Bloomberg. "Resales rose 2.3% in the South and increased 1.5% in the Northeast. Contract signings fell 8.1% in the West and 9.3% in the Midwest." Bloomberg also notes a contrast in housing numbers that have made the headlines lately. For example, the NAR numbers differ sharply with the 2.9% hike in new home sales reported by the U.S. Commerce Department last week. The interest rate picture tells a disparate story, as well. "December home sales were aided by lower 30-year fixed mortgage rates, which averaged 6.27% in December, compared with 6.33% the prior month and 5.87% for all of last year," says Bloomberg.
The NAR predicts that the 30-year fixed-rate mortgage will rise to 6.5% this year. It also predicts a 4.67% decline in home purchases in 2006 from last year's combined sales record of 8.388 million units. One explanation for the home sales trough could be that the rough market is keeping investors away from the housing market. "The departure of speculative buyers from the national housing market is responsible for some of the short-term softness," Ara Hovnanian, chief executive of New Jersey homebuilder Hovnanian Enterprises Inc., told Bloomberg. "Falling mortgage rates are helping soften the decline." The news service explains that investors buy homes to make money, rather than to provide shelter. Subsequently, speculators aren't as negatively impacted by home prices as first-time homebuyers. In addition, speculators often drive up home prices, making it difficult for those who don't have the financial resources to compete for home purchases. Bloomberg says that the average first-time homebuyer had only 68.4% of the income needed to qualify for a conventional mortgage. Editor's Note:
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