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With the reports of holiday spending coming in above the expectations of most, the new worry of those who choose to look through the economic glass darkly is that consumers are now tapped out. Their first worry is that consumers have no savings to fall back on.
It is true that the personal savings rate is near zero. But the way the Bureau of Economic Analysis measures savings misses most of the ways consumers save today. If you refinance your home, pulling out some extra cash in the process is not counted as savings. Gains made in the stock market are not savings. If you put money into your company 401K every month, that is pre-tax income and does not count as savings.
A better way to look at the balance-sheet health of consumers would be to examine the changes in net worth. Household net worth through the 3Q 2004 stood at $46.5 trillion, which is up 8.6 percent in the past year and more than 80 percent in the past decade.

Household Net Worth
Trillions $



Source: Bureau of Economic Analysis

If the low level of savings isn't enough to worry about, then the pessimists argue that consumers are up to their eyeballs in debt.
Yes, debt burdens are high but they have been higher. Does anybody worry about General Motors being up to their eyeballs in debt? No, because General Motors has both the cash flow to service that debt and the asset base to maintain that cash flow. The same is true of consumers. A better measure of the state of the household balance sheet is financial leverage. Despite the rapid growth in debt over the past few years, overall household leverage is down. Rising home and equity values have increased household assets at a faster pace than the increase in debt.
For every dollar of debt the household sector has, they have just over $5.70 in assets. In the past two years, for every dollar increase in debt, households have added $1.20 in assets -- hardly a cause for concern.
And finally, the health of the discounters and dollar stores is supposedly being hurt by the fall in real wages, which cut into consumer purchasing power.
While real wages were down in the second half of 2004, there was an unusual development at this stage in the business cycle. Usually when the jobless rate falls, wages begin to pick up. The decline in real wages was due to two factors. First, the sharp rise in oil prices pushed up consumer inflation and undercut wage gains. Secondly, benefit costs rose sharply, again decreasing the ability of employers to raise wages.
In late October, the commodity exchanges all increased the margin costs to trade energy contracts. That skimmed off much of the speculative froth from the price of energy. Warmer weather and less speculation pushed energy prices down sharply. Lower energy prices will result in lower inflation and higher real wages.
The case for sustained consumer spending starts with an improved job market. Following the presidential election, most surveys of CEO confidence indicated the prospect of a rebound closely tied to increased hiring expectations. Since the beginning of 2004, the pace of employment growth has been slowly improving. In the past year, employment has increased by just over two million jobs and in 2005, employment growth is likely to do even better.
So, far from being a source of worry for the economy, consumers in 2005 should continue to be a source of economic strength. Stronger job growth coupled with a deleveraging balance sheet will put consumers in a position to continue spending much as they have over the past three years.