US savings picture brightens a little

America still has debt problems, but as of this week the phrase "negative savings rate" no longer applies to the nation's household habits.

Through June of this year, US citizens have socked away $164 billion. Moreover, in releasing its annual revision of prior-year data, the Commerce Department now says that Americans earned more income than they spent in 2005 and 2006 – a reversal of prior tallies showing a negative savings rate for those years.

This doesn't mean that no debt burden hangs over American households. But it indicates a healthier outlook for consumer finances – a welcome boost as the economy navigates the worst housing-market slump in a generation.

The improving savings picture also hints that reform is possible – perhaps even inevitable – for a nation that, by some measures, still lives on the financial edge.

"People in some sense were doing what the market was telling them to do," by borrowing during a period of low interest rates and fast-rising home prices, says Paul Kasriel, chief economist at the Northern Trust Co. in Chicago. "Now it's in reverse," as interest rates have risen and the key family assets – houses – have stopped soaring in value.

In the long run, Mr. Kasriel foresees an era of belt-tightening for households and for the nation. The shift toward a positive savings rate could be an initial step in that process.

The savings-rate revisions, released Tuesday, were also incorporated in the Commerce Department's latest economic snapshot.

On Friday, the agency said the nation's gross domestic product grew at an annual pace of 3.4 percent in the second quarter. Because personal spending was lower than previously reported, the growth of GDP was revised downward for the years 2003 through 2006. Economic growth averaged 3.2 percent during those years, down from 3.5 percent in previously published estimates.

Weaker growth then may mean stronger growth now, some economists say. Since consumers weren't quite as profligate as believed, they could have more staying power in the months ahead.

"The overall stress on consumer spending is not nearly as severe as the previous data indicated," economist Charles McMillion of MBG Information Services writes in a commentary on the data. Still, that stress remains significant, he says.

Rising costs for things like healthcare and energy are devouring pay hikes for many workers. Mortgage payments are resetting upward for many people with adjustable-rate loans. And in recent years, easy lending conditions have prodded people to bid up home prices – sometimes because families are stretching to live in better school districts for their kids.

These conditions help explain why the savings rate, even now, is historically low.

"It's still really the lowest it's been since the early 1930s," Mr. McMillion says in an interview. "The average person is having to borrow just to get by."

In the new Commerce Department figures, personal income for the nation was revised up by 0.6 percent ($62 billion) for 2005 and by 0.8 percent ($92 billion) for 2006. That helped push the personal savings rate to a positive 0.5 percent of disposable income for 2005 (versus a previously reported minus 0.4 percent), and a positive 0.4 percent for 2006 (versus minus 1 percent before).

But the savings rate remains far below historic norms, and below rates in other advanced economies .

Also troubling, McMillion says, is that much of the upward revision in personal income stemmed from greater interest and dividend income, not wages. That suggests that the savings picture has improved mainly for the best-off Americans, those with substantial financial assets.

"It's amazing how highly leveraged middle-class and upper middle-class households have become," he says. Many lower-income households live with no savings to cushion them from bankruptcy.

It is unclear whether other nations, such as China, will continue to be net lenders to the US. Some economists say such lending has helped to keep American interest rates low.

"The US is going to become an even bigger exporter than it is today," Kasriel predicts. "We owe the rest of the world a lot, and they're going to start collecting."