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Unraveling the Savings Mystery


Despite the latest Wall Street rally, the value of U.S. equities remains nearly 20% below its peak 14 months ago, and many observers still expect households spooked by falling stock market wealth to rein in consumption sharply. In light of the negative personal savings rate, they claim that those who stopped saving and began spending wildly during the market boom will now tighten their purse strings and put a lot more aside to rebuild savings.

At least as far as this picture applies to the behavior of average Americans, however, a new Federal Reserve staff working paper indicates that it is seriously flawed. Despite widening public ownership of stocks, it finds that most people did not boost their spending as a result of the market boom. Almost the entire drop in the personal savings rate, it concludes, reflected the actions of the most affluent households--the top 20% in the income scale.

In the study, economists Dean M. Maki and Michael G. Palumbo draw on data from both the Fed's triennial survey of consumer finances and its Flow of Funds report. The first provides details on household balance sheets by income level in 1992, 1995, and 1998; the second records aggregate shifts in the household sector's various assets and liabilities over the past decade. Acting on a suggestion by Fed Chairman Alan Greenspan, the authors combined the two data sources in order to estimate changes in saving behavior by different income groups.

Between 1992 and 2000, they report, the household sector on a net basis sold $2.3 trillion of directly held stock, nearly 50% more than its net purchases of equity and bond mutual funds. And the biggest share of directly held equities--some 80% in 2000--were owned by the top 20% of households.

Thus, the data suggest that these affluent households drastically reduced their saving by selling stocks and spending the proceeds, even as the soaring value of their remaining equity holdings greatly increased their wealth. The result, the authors estimate, was a sharp drop in their savings rate from 8.5% of disposable income in 1992 to a negative 2.1% in 2000.

But this wasn't true for the vast majority of households. Indeed, far from cutting savings, most began squirreling more of their incomes away, with the savings rates of the bottom 40% of households rising from around 4% in 1992 to over 7% in 2000.

Maki and Palumbo conclude that "all of the consumption boom of the latter 1990s and virtually all of the decline in the personal savings rate in the last decade can be attributed to the richest groups of households." They also estimate that the top 20% of households accounted for 46% of total consumer expenditures last year.

Whatever the size of the wealth effect on overall consumption over the next year, the study's implications for the pattern of spending cutbacks seem clear. Unless the stock market moves to even higher ground and stays there, luxury goods, expensive cars, trophy homes, and other high-end items are likely to suffer from sagging sales. There's no question that senior citizens these days are enjoying healthier, more active lives. But a new study by Rand Corp. economists Darius Lakdawalla, Dana Goldman, and Jay Bhattacharya suggests that this trend toward improving health could conceivably halt or be reversed in future decades.

The authors confirm earlier research findings that disability among those over 65 has fallen since the early 1980s--presumably because of medical advances and a decline in smoking and other bad health habits. Their analysis of recent disability trends among younger Americans, however, is less reassuring.

Specifically, after declining in the 1970s, the disability rates of those in their 20s to their 50s actually tended to rise between the mid-1980s and the mid-1990s. Among those in their 40s, the rate of disability rose at least half a percentage point, or 20% to 30%.

While some of this increase in reported disability may reflect the greater availability of government disability insurance benefits, the researchers argue that it mainly stems from deteriorating health. They note, for example, that it has coincided with significant rises in the incidence of obesity, diabetes, and asthma--illnesses that can cause disability among those most severely afflicted.

Such a trend is ominous, to say the least. If a rise in disability among the young translates into a rise in disability among the future elderly, Medicare and the health system will face even greater pressures than currently projected. Skeptics of the productivity-enhancing effects of office PCs often point out that workers are spending more and more of their time online on such pursuits as personal e-mail, shopping, and visiting entertainment sites. As a new American Management Assn. survey indicates, it's a charge that employers aren't taking lightly.

According to the AMA, nearly 80% of major U.S. companies now keep tabs on their employees by checking their e-mail, Internet, or phone connections, or even videotaping them. Four years ago, only 35% of companies engaged in such active monitoring.

The most intensely checked activities are employee e-mail and use of the Internet. Some 47% of big companies now review employee e-mail, the AMA reports, up from 15% in 1997 and 38% last year. And the share of employers monitoring workers' Internet connections has jumped from 54% to 63% in the past year alone. Indeed, 25% of those surveyed report that they have fired employees for misuse of the Internet or office e-mail.


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