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Americans tightening belts

More consumers are trimming spending and debt because their net worth has fallen fast.

By Ron SchererStaff writer of The Christian Science Monitor / October 10, 2008

Shopping: New York City resident Tanya Acevedo walks with her daughter, Angelina, after a trip to a supermarket. Ms. Acevedo compares prices between two grocery stores near her home.

Ann Hermes/The Christian Science Monitor

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New York

The dramatic changes in the US financial system – the debt write-downs and consolidation of corporate balance sheets – are now mirrored at kitchen tables around the United States.

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Households are cutting spending, paying down debt, and rebuilding their personal balance sheets. The belt-tightening may have been spurred by two years of falling home values followed by surging energy and food prices, but the effect could be longer lasting.

Americans are now trying to live within their incomes. If they succeed, it would boost the anemic US savings rate and signal a shift in the way Americans view their finances.

"As the US economy boomed, people thought of credit as savings," says Dennis Jacobe, Washington-based chief economist at the Gallup Organization. "They saw it as something they could fall back on.... Now a lot of people are finding out they do not have the money they felt they had."

One indication of this new world: On Tuesday, Federal Reserve data showed that consumer credit contracted 3.7 percent in August, the first drop in 10 years.

For many Americans, the belt-tightening began when the price of gasoline surged past $3 a gallon 1-1/2 years ago.

The last time Lisa Blount filled up her Audi, she spent $80. "That will barely last me a week," says the Winter Springs, Fla., resident. So she's cut her fuel bill by cycling to work – a 25-mile commute – two to three times a week.

Now, a wider swath of Americans is considering cutting back because their net worth is suddenly falling at a fast pace. Since last October, household net worth has fallen more than $6 trillion, estimates Mark Zandi of Moody's That calculates to roughly $55,000 per household.

"It's now affecting higher-income, wealthier households who will rein in their spending because they feel they are worth less and will be worth less for a long time to come," says Mr. Zandi.

Larger effect of falling net worth

Economists have long struggled with the fine art of estimating how people's rising or falling net worth affects the economy. But as a rule of thumb, Zandi says, figure that every dollar decline of someone's net worth reduces spending by 5 cents over a two-year period.

Since consumer spending represents a significant part of the economy, any reduction in spending will reduce the US gross domestic product (GDP). In fact, the decline in household net worth will shave 1 percent off the GDP in the coming year," Zandi estimates.