P.S. – Save This Column!

The savings habits of American consumers raised eyebrows in 2005 when it was widely reported that the personal savings rate tracked by the Commerce Department actually fell to zero. It seemed like an event with potentially ominous repercussions, especially when you consider that Americans saved 10.8 percent of their after-tax income in 1984.

That rate has been drifting downward ever since, but it doesn't necessarily mean that the nation as a whole is living above its means. The personal savings rate measures saving as a share of disposable household income, but it doesn't consider capital gains such as profits on housing or stocks (realized or not). And it's just one component of the nation's savings rate, which also includes the government and the business sector.

Some economists have expressed fear that persistently low savings rates could eventually lead to lower investment rates, as well as declines in labor productivity and real income.

Could reduced saving eventually have a negative effect on economic growth in the United States? Fortunately, total business saving is considerably larger than household saving, and has been rising over time. Despite these increases, the U.S. savings rate as a whole has been falling since the early 1980s, though not nearly as drastically as the personal savings rate.

Rainy-Day Savings
Business saving can be thought of as undistributed corporate profits. Stock investors can rest assured that companies have had the foresight to save for a rainy day. In 2004, companies set aside about $1.4 trillion in retained profits and depreciation allowances.

Gross private saving is the sum of all household and business saving. During the last half of the 20th century, the business sector was the dominant component of private-sector saving – accounting for 93 percent of private saving in 2003-04, up from roughly 65 percent in the early 1950s.

Between 2000 and 2004, the savings rate for U.S. businesses weighed in at 13.1 percent of gross domestic product.

Excess income generated by businesses can be reinvested to create growth in productivity rates, and may eventually lead to higher wages. In fact, while the savings rate has been falling, productivity growth has surged to the highest levels since World War II.

At the same time, the potential for economic growth has accelerated due to those sustained increases in labor productivity. Additionally, economic growth in the United States has outpaced countries with significantly higher savings rates.

Saving and investing are the keys to improving the standard of living for individuals and entire nations alike. The business sector's willingness to put away profits in preparation for the future just may save Americans from suffering as a result of their spending spree.

Craig Langweiler is president of the Langweiler Financial Group, in Newtown. He can be reached at 215-860-8066 or at: clangweiler @americanportfolios.com.