Consumer Spending and Saving
Consumer spending sustained its strong growth during the four quarters of 2006 (rising 3.7 percent in real terms), continuing its 15-year pattern of rising faster than disposable income. Several factors helped to keep spending elevated, and as a result, kept saving down (according to the official definition in the national income and product accounts (NIPA)). These factors included rising energy costs (through the third quarter), rising wealth, and falling unemployment rates. As a result, the personal saving rate fell to a negative 1.0 percent for the year as a whole-its lowest annual level during the post- World War II era. Despite the negative saving rate, Americans continue to build wealth in the form of capital gains (the rise in asset prices), which are not included in the definition of saving in the NIPAs. The declining saving rate continues a long-term trend which began in the 1980s.
Energy Expenditures.
World demand for crude oil increased from 79.74 million barrels per day in 2003 to 84.18 million barrels per day during the first three quarters of 2006. The United States accounted for about one-eighth (0.5 million barrels per day) of this higher (4.4 million barrel per day) pace of crude oil consumption. Most of this increase in world demand was accounted for by non-OECD countries (up 4.1 million barrels per day). Consumption of the non-U.S. OECD countries fell 0.2 million barrels per day. In the face of this increase in world oil demand, the supply available to U.S. consumers was restrained, and consumers paid higher prices to maintain their consumption.
With the rise in energy prices, nominal energy purchases rose sharply. That consumers altered their spending patterns only slightly contributed to the fall in the saving rate. Consumer energy prices increased 29 percent relative to nonenergy prices (according to the NIPA price indexes) from the fourth quarter of 2003 to the fourth quarter of 2006, while real consumption of energy per household fell only slightly, by 2.1 percent. Between 2004 and 2006, consumers appear to have maintained both energy and nonenergy consumption by reducing their saving. Consumers response to persistently high energy prices is likely to emerge gradually, as consumers economize on energy consumption and possibly on nonenergy consumption.
Wealth Effects on Consumption and Saving.
The rise in household wealth has also played a role in the decline of the saving rate. During the late 1990s and again during the past 3 years, a strong rise in household net worth coincided with a sizeable increase in consumer spending relative to disposable personal income.
Despite the negative saving rate during 2006, Americans continued to build wealth because of capital gains. During the four quarters ending in the third quarter of 2006, the household wealth-to-income ratio increased 0.04 years, to 5.63 years of income. (The units of the wealth-to-income ratio are years because wealth is measured in dollars while income is measured in dollars per year. That is, total household wealth in the third quarter of 2006 represents the equivalent of 5.63 years of accumulated income.) More than half of the increase during these four quarters was accounted for by an increase in stock market wealth. Housing wealth (net of mortgage debt) also edged up relative to income over these four quarters, but by much less than its increases during the preceding 2 years. By the third quarter of 2006, the overall wealth-toincome ratio was well above the ratio over most of the past 50 years.