Big blow as big spenders turn big savers

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(China Daily)
Updated: 2008-10-21 07:19

The US may be on its way to becoming a nation of savers, whether Americans like it or not.

With home and stock prices declining and credit hard to come by, consumers who have fallen out of the savings habit are being forced to curb borrowing and rein in spending.

That is bad news for companies catering to them, which will have to retrench as well. Detroit automakers may need to slash costs and merge as Americans hold onto their cars longer. Shopping malls might be forced to shut as retail traffic trails off. Hotels may have to shelve expansion plans as vacationers become stingier with their dollars.

The big concern is that households, spooked by the turmoil in financial markets, will cut back rapidly and sharply, plunging companies into bankruptcy and deepening a recession that many economists say has already begun.

"If we did have a quick cut in spending, it could turn a pretty nasty recession into possibly the worst downturn we've seen in the postwar period," said Michael Feroli, a former Federal Reserve official now at JPMorgan Chase & Co in New York.

There are signs that consumer spending is already giving way. US retail sales fell in September for the third straight month, the longest slump since the government began keeping records in 1992. And consumer confidence as measured by the Reuters/University of Michigan index fell by the most on record this month.

"We are going through a quantum downward shift in consumer spending," said Allen Sinai, chief economist at Decision Economics in New York. "Any industry that is tied to the consumer will have to downsize and consolidate."

From 1960 until 1990, households socked away an average of about 9 percent of their after-tax income, Commerce Department figures show. But Americans got out of the saving habit starting in the 1990s as they saw their wealth build up in other ways, first through surging stock prices and later through soaring home values.

Meantime, looser credit standards made it easier for people to afford major purchases without having to save up to pay for them. The result: Since 1990, they have set aside less and spent more, pushing the savings rate down to an average of 3.5 percent. It was less than 1 percent in each of the last three years.

That may be about to change as wealth and credit evaporate. Credit is also harder to get. Add to that a cyclical rise in the unemployment rate, it is no wonder households are hodling back.

"Consumers are starting to realize that they've been living in a fantasy world," said Lyle Gramley, a former Fed governor who is now senior economic adviser at Stanford Group Co in Washington. "They will have to begin salting away money for retirement, their children's education and other reasons."

In the long run, higher savings would be good news for the US economy, because the extra money would help put household finances on a sounder footing and reduce US dependence on investment by other countries to finance economic growth.

In the shorter run, though, it will likely mean wrenching changes for companies that have become reliant on rapidly growing consumer spending.

The Washington-based National Retail Federation says this may be the worst holiday selling season in six years, with sales rising 2.2 percent in the last two months of the year from the same period in 2007.

"The economic and financial crisis will have long-lasting effects on the consumer," Gramley said. "The personal-savings rate is going to increase over the next five to 10 years."