The saving and buying habits of American consumers are crucial to the nation's economy, indeed to the global economy, and they are the focus of a growing debate.
Last year, the United States posted another year of robust economic expansion, courtesy of its free-spending consumers, even as exports and manufacturing activity plunged amid serious economic problems abroad.
Some warn that the trend is not sustainable.
"An unprecedentedly large and growing gap between private spending and income now exists," economists Wynne Godley and Bill Martin pointed out, "and that gap has been financed primarily by an increase in borrowing."
Last year, private spending rose 6%, or roughly twice the increase in disposable income. Absent this heavy spending, the nation's economy clearly would have stagnated, said Mr. Godley and Mr. Martin, who have studied the issue for the Levy Economics Institute of Bard College, Annandale, N.Y.
For this pattern of demand growth to continue in the next five years, spending would have to exceed income by an amount double the unprecedented 1998 level, they calculated in a forthcoming report.
Just to keep the economy moving at a 2% annual growth rate, consumer spending would have to equal 8% of gross domestic product-up from a record 4.8% in the fourth quarter. Net lending to the private sector would have to reach an unprecedented 20% of disposable income, and external net debt would surpass 30% of GDP, "thanks to a large and widening trade gap."
"Because a process that is accelerating is intrinsically unsustainable, the present pattern of American growth cannot continue," the economists said.
As they see it, the potential ramifications are sobering.
"At some stage, private sector spending will subside to a rate at best equal to, and more probably below, private sector income," wrote Mr. Godley, a Levy Institute scholar, and Mr. Martin, chief economist at Phillips & Drew, a fund management company based in London.
"In turn, production and incomes would also subside, as would overseas activity (hit by lower sales to the United States), thus curbing overseas demand for American exports. The stock market bubble responsible for much of today's spending buoyancy would burst, amplifying deflation."
The shock from these developments could potentially wipe out economic growth on average over the next five years, they warned. Unemployment, which has recently fallen to three-decade lows, would soar.
Damage to the rest of the world would be severe. Worst hurt would be those economies heavily dependent on exporting to the United States- Canadian, Asian, and Latin American.
Other economists readily agree that consumers are the driving force behind the buoyant U.S. economy but seriously doubt any huge and destructive shift in underlying trends is imminent.
HSBC Group economist L. Douglas Lee, after a special study of the issue, offered a more optimistic scenario. The decline in consumer savings is not critical, he said, nor is expansion of debt yet a threat to further growth.
Meanwhile, mortgage refinancing will continue to supply funds that can be shifted into consumption, and "the huge accumulation of wealth will provide a cushion against any market correction," he said.
"All of these factors are likely to contribute to faster consumption growth than the underlying increases in income and wages will support," Mr. Lee acknowledged. And a slowdown is likely.
Still, after reviewing the labor market, he concluded that the economy is likely to add one million to 1.5 million jobs this year, which should help fuel 2.5% to 3% growth in consumption. "While this is not shabby for the ninth year of an economic expansion, it is much slower than the 5.2% increase recorded last year," he said.
Other economists dismiss the negative savings figures as misleading and take a different view of the consumption versus income pattern.
The rate of personal savings is a cash-flow measure that excludes savings through either business' retained earnings or unrealized capital gains, said economists Mickey D. Levy and Peter E. Kretzmer of NationsBanc Montgomery Securities. It also excludes claims on private pensions or Social Security.
Meanwhile, the key point is that both consumption and incomes are rising, albeit at different rates, with consumption fueled by lower interest rates, rising financial wealth, and lower oil prices.
"We expect a moderation of consumption growth in 1999," Mr. Levy and Mr. Kretzmer said. "But that's no disaster, just an adjustment following a period of robust spending driven by a host of positive factors."