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America's Savings Gap Widens: Awareness, Product Innovation Seen as Key Solutions

Alarms went off across the country last week when the Commerce Department reported that the national savings rate is near an all-time low, but it's unclear exactly how those numbers should be read by the money management industry.

For starters, some experts argue that the monthly report is misleading. A macro-economic barometer, it includes corporate savings and also takes into consideration the national deficit, which is approaching the neighborhood of $800 billion.

Perhaps more importantly, the after-taxes measurement doesn't consider pre-tax money that Americans have in mutual funds, either separately held or through employer-sponsored retirement plans, where contributions currently average about $10 billion a month, according to Lipper.

Those contributions levels, however, are half what they were just two years ago and almost one-fifth of what they were in the mid- to late-1990s. But that doesn't necessarily mean that people are spending more than they're saving. It's just at the end of the day, they don't have a lot left to save.

"The government's report doesn't include mutual funds, so obviously, they're missing a lot of money," said Andrew Clark, a senior research analyst at Lipper in Denver. "What connects the savings rate and fund flows is the negative growth in real wages. That's affecting mutual fund flows and the national savings rate."

In 2005, Lipper data shows, real wage growth in the U.S. fell to a negative 0.8%, which compares to 4% six years ago. Hourly employees, who account for more than 80% of the nation's work force, absorbed most of that wage contraction.

So, in short, that means there's less money to go around, and with a another flat equities market on the horizon, money managers would be wise to take a lesson from the last bear market, Clark observed, where hot asset-gathering products took a back seat to more traditional, long-term investments.

"If the assets at all costs' attitude of the 1990s has not persuaded money managers that it is a bankrupt strategy, they should be convinced now," he said.

What might be more difficult is convincing Americans that the spending power they've enjoyed in recent years is likely at an end.

Last year, as the government's report shows, the nation's personal savings rate dipped into negative territory - minus 0.5% - which means Americans not only spent all of their after-taxes earnings last year, but they actually tapped into previous savings or borrowed money. Most people leaned on soaring home values or strong performance by the equities that they do own, but ominous signs lie ahead for those assets.

"We believe that the U.S. economy is at the true dawn of a prolonged but gradual weakness in housing," said Richard Hoey, chief investment strategist at New York-based Dreyfus, in a market commentary last week. "The housing sector has already reached its peak, and nationwide housing prices have begun a prolonged stall."

The most recent numbers from the National Association of Realtors also point to normalization in housing values this year. Pent-up demand has been met over the last five years, and rising interest rates are finally having an impact, the Washington-based group said earlier this month. The national median existing-home price for all housing types is forecast to rise 5.1% in 2006. Last year, the group, which still awaits final results, projected a jump of 12.9%.

"Home prices generally will rise much closer to long-term norms," said Thomas Stevens, the organization's president.

Experts are also predicting a cooler equities market. Generally, they've pegged GDP growth at about 3%, slowed by the higher interest rates and energy prices. Robert Doll, president and CIO of Merrill Lynch Investment Managers in New York, is predicting a 10% slowdown in the equities markets this year.

"Volatility is going to pick up," he recently said.

Taken together, these factors contribute to a false sense of wealth among Americans, said Paul Kasriel, senior vice president and chief economist at Northern Trust in Chicago. Kasriel said the Commerce Department's numbers offer a pretty accurate picture of the nation's savings situation, regardless of which assets it includes or excludes. Citing annualized household wealth statistics from the Federal Reserve that include pre-tax contributions to savings plans, Americans spent more than they saved by a negative $512 billion in the third quarter of 2005.

"Those numbers have been negative on an annual basis since 1999. Households have been spending more than they have been earning," Kasriel said. "If you want to put lipstick on the pig, you can do it, but you can't get away from those numbers.

"You can include this, you can exclude that," he continued, "but why are people borrowing so much? Because they're not saving, they've been borrowing to buy SUVs and McMansions. Today's partying is a recipe for a hangover tomorrow."