We're a bit tired of hearing of the over-extended consumer. An oft-cited statistic, the net savings ratio, plays on the fears that the US consumer's conspicuous consumption is out of control and cannot possibly continue. Don't believe it.
As illustrated in the chart below, the US net savings rate has been steadily declining the past few decades and is negative for the first time in history—meaning consumers are spending more than they receive in income.
This may sound reckless but in reality it's completely rational. Rarely is carrying zero debt and socking away every penny of extra earnings the correct decision. Much like a corporation, individuals can leverage their balance sheets to take advantage of low interest rates and higher returns elsewhere. And that's exactly what they've been doing, to great success. Household net worth has increased an average of 10% a year in the past three years, a time when virtually every member of the media decried the precarious position of consumers.
But if that doesn't convince you, perhaps pointing out some of the flaws in the calculation of the savings rate will:
It's safe to say consumers are in better financial shape than they have ever been. Don't bother with negative savings mumbo jumbo. Toss it in the heap with the other economic statistics to ignore.
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