In March, Personal Income rose by 0.3% while Personal Consumption Expenditures rose by 0.6%. Both numbers were in line with expectations.

The numbers for both were revised higher for February; it is now estimated that personal income rose by 0.1% rather than being unchanged. Also, it was up by 0.4% rather than 0.3% in January.

The spending revisions were a mixed picture, with February being revised up to 0.5% rather than 0.3%, but January’s increase being only 0.3% instead of 0.4%. If people are increasing their spending more than their incomes are going up, that can only happen if people are saving less, or going into debt. Economically, the two things are very similar (it really doesn’t matter to the economy if you pay with your credit card or your debit card). The annualized rate of personal savings dropped to $304.0 billion in March from $332.4 billion in February. The Savings Rate declined to 2.7% from 3.0%.

A falling savings rate does help give the economy a boost. There is more economic activity going on if consumers are increasing their spending by 0.6% than there would be if the rate of spending rose only by the 0.3% increase in incomes.

Over the long term, though, a low savings rate is like a cancer on the economy. It means that we don’t generate the capital we need to invest internally to grow the economy in the future, and we must import that capital. Importing capital is another way of saying we run a trade deficit, since as a matter of accounting identity, a current account (or trade) deficit has to be matched dollar for dollar by a capital surplus. Savings has to equal investment, and if we don’t creating the savings here, we have to import them, recently mostly from China.

As is shown in the graph below (from the savings rate (shown as a 3-month moving average) has been in a secular decline since the early 1980’s. While the savings rate normally increases in recessions and falls during expansions, the declines during the last three expansions (a truly bi-partisan effort) have been particularly steep. Back in the 1960’s and 1970’s, savings rates of over 8% used to be the norm, vs. rates of less than 4% so far this century. The savings rate jumped sharply early in the recession, but is now collapsing again.

There was, however, some good news in the composition of the increase in income. Wages rose by $11.8 billion, up from a $6.8 billion increase in February, with a particularly large swing in wages at goods producing firms, which increased by $2.2 billion rather than falling $3.3 billion (the snowstorms of February might have temporarily depressed wages from construction), but the manufacturing side of good production saw in increase of $0.3 billion rather than a $1.1 billion decline.

Proprietors incomes, a good measure of small business health, rose by $2.7 billion rather than declining by $3.3 billion. Rental income edged up slightly rising by $1.9 billion rather than $1.8 billion. The very low interest rates though have taken their toll on savers, with interest and dividend income declining by $8.3 billion on top of the $8.4 billion decline in February.

While the ultra-low interest rates at the Fed are called for in the current environment of vast amounts of unused capacity, both human (unemployment) and physical (low capacity utilization), the net effect is a subsidy of the big banks like Bank of America (BAC) and JPMorgan (JPM) by savers. This subsidy is seen in the extremely poor rates available on CDs and other savings vehicles available from the banks. The banks are able to borrow short-term for almost no cost, and can invest in longer-term T-notes with no credit risk and earn 3 or 4% (depending on how far out on the curve they want to go). With the size of the balance sheets at the big banks, that can add up to some very big dollars.

However, the biggest increase in personal income came from a much less encouraging source. Personal current transfer receipts, or government payments to individuals for things like Social Security and unemployment benefits, increased by $24.9 billion up from a $7.3 billion increase in February. Of that, $12 billion was from extended unemployment benefits. With the government running a massive deficit, that means that the national savings rate is even lower than the 2.7% rate would indicate.

In the short term this report is pretty good news, but was largely in line with expectations, so it should not have that much impact on the markets. Longer term it is a real problem. Savings rates below 3% are simply not sustainable over the long term. If they persist, either we will have to stop investing, with disastrous long term implications for economic growth, or more likely we become ever more indebted to other countries. Eventually they will end up owning most of the assets in the country, and America will lose a great deal of the independence that we cherish so much.

Dirk van Dijk, CFA is the Chief Equity Strategist for With more than 25 years investment experience he has become a popular commentator appearing in the Wall Street Journal and on CNBC. Dirk is also the Editor in charge of the market beating Zacks Strategic Investor service.

More about Zacks Strategic Investor >>

Read the full analyst report on “BAC”
Read the full analyst report on “JPM”
Zacks Investment Research