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In tough times, US consumers forging new behaviors

American spending has fallen further in the past six months than it has since 1974.

By Staff writer of The Christian Science Monitor / February 2, 2009

Shoppers converge in Boston, but Americans overall are spending less and saving more.

Mary Knox Merrill/Staff

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Consumer behavior in America appears headed toward a new normal that includes less household debt, more saving, and cooler expectations about home prices in the future.

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The latest sign of this transition came Monday, when the US Commerce Department reported that consumer spending fell in December for a record sixth straight month, and the savings rate rose.

While personal income fell 0.2 percent for the month, spending fell even further – a full percentage point.

Much of what’s happening is a short-term reaction to tough times as the risk of unemployment has risen. But economists say it also reflects a longer-term transition in response to the end of an era of soaring home prices.

Over the past few months, consumers have staged their largest pullback in spending since the recession of 1974 – even though falling energy prices have effectively put more cash in their pockets. But those gas-pump savings still represent a boost for households, which could help set the stage for consumer spending to begin to revive later this year.

“It’s helping to repair the balance sheet, which is all to the good. It creates a stronger potential for consumer spending down the road,” says Ken Mayland, president of ClearView Economics near Cleveland. “We are going to see a new consumer emerge from this rubble.”

Consumer spending to rebound?

Forecasts these days come with a large degree of uncertainty, but most economists see consumer spending resuming an upward trend later this year, according to a January survey by Blue Chip Economic Indicators. Most say that the worst of the recession will soon be in the rearview mirror.

For now, though, the economy is feeling the shock as consumers transition from old behaviors to new ones.

For much of this decade, many Americans lived beyond the means of their regular income, tapping cheap credit and the rising value of their homes for extra cash. For a time, the savings rate fell to zero.

Now Mr. Mayland figures that cooler demand for credit “will persist for a good long while,” and the savings rate will rise. He doesn’t expect it will match the levels of 8 to 10 percent of disposable income that were common before the 1990s, but in December Americans saved 3.6 percent of their income.

Beth Byrne is one face of the new economy of 2009.

With interest rates now historically low, the Boston-area resident was recently able to refinance the mortgage on the home where she’s raising her two children. But she figures the wise thing is not to spend much, if any, of the roughly $200 a month that stays in her bank account as a result.

“I don’t think it’s going to go toward buying new things,” she says.

She’s not the only one thinking that way. In the final quarter of 2008, the savings rate reached its highest level since 2002, according to numbers the Commerce Department released Friday. As Americans held onto more of their income, consumer spending fell at a 3.5 percent annual pace, accounting for much of a 3.8 percent annualized dive in gross domestic product (GDP).

The shift appears tied to expectations that the economy won’t return to roaring growth in the near term. In a late-January Diageo/Hotline poll, 43 percent of Americans said they expect it will take two to four years “before the economy comes out of recession and is back on track.” Among the other respondents, as many said it will take even longer than that as said the time will be shorter.

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