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.
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 Economy.com. 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.
Some of the spending cuts are also related to Americans' efforts to rebuild their personal balance sheets, says Sara Johnson, a managing director at Global Insight, an economic forecasting group in Lexington, Mass. "They have been depleted by the drop in home prices and stock prices," she says.
If Americans do cut down on debt, it would mark a major shift. From 2003 to 2006, consumer liabilities increased at double-digit rates, Ms. Johnson says. She is anticipating that debt accumulation will slow to an average of 2.5 percent for each of the next two years.
"The last time liabilities increased more slowly than income was 1992," she says.
Americans are already cutting down on debt, either voluntarily or because they no longer qualify for new loans. For example, it's getting more difficult to get an automobile loan. According to CNW Marketing Research in Bandon, Ore., only 63 percent of consumers applying for a car loan are being approved compared with 83 percent a year ago. Auto sales fell 27 percent in September compared with a year ago.
Moreover, some people who lease their cars are looking for an out. LeaseTrader.com reports a 30 percent spike in the number of people using its website to try to get out of a car lease so they can downsize their cars, says spokesman John Sternal.
"You've got all kinds of economic reasons," says Mr. Sternal, including gasoline prices, job loss, and people finally getting caught up with their credit and debt situations.
Aside from autos, another big-ticket item seeing a downturn is boats. The National Marine Manufacturers Association (NMMA) estimates that sales of powerboats were down 23 percent this August compared with a year before.
Sales have been declining for the past two years, according to the Bellwether Report, issued by Info-Link Technologies Inc. in Miami. The company tracks sales by analyzing applications for fishing licenses and state sales-tax payments, among other things.
"Boat loans are harder to get, and fuel prices have had a big impact as well," says Jesse Wells, director of sales and marketing. "Some 80 percent of all boats sold are 18 feet or less, and that's an easy purchase to put off."
For other Americans, the tough job market is causing them to rein in spending. Last week, the government reported there were some 159,000 fewer people employed.
Raul Vargas of Orlando, Fla., can relate. In July, he lost his job as a nuclear pharmacy technician. He's getting by on temp work, helping a bookstore move. "Entertainment is out," Mr. Vargas says. "Going out to eat, I've had to cut back."
Big monthly rents
Even in New York City, where residents often have to pay huge monthly rents, some belt-tightening appears to be happening.
Greg Wilpert has been trying to find a cheaper apartment since last May, but he has yet to find someone to sublease his Park Avenue apartment. A couple of prospective renters trickled in each week over the summer, but since September, no one has even come to look at it.
"We thought the apartment was a good deal, [but] rents have been going down. It's probably not such a good deal anymore," says Mr. Wilpert, who's looking to spend 30 to 40 percent less than he's currently paying.
"It makes me worry about myself and my family," said Ms. Trejo as she waited to attend a math class at San Diego's Mesa College, where she's been working toward a degree in criminology. "How are we going to live? We already live paycheck to paycheck. Who can afford to pay all the bills?"
Trejo says her aunt lost her house in Las Vegas to foreclosure, and now Trejo wonders if the housing-market mess will ruin her own plans to buy a home with her husband. "It's scary about people losing their homes," she says. "I don't want to be in that situation."
There are even some Americans, often the frugal ones, who view the current situation as a good lesson for America. "The government and people in general have been going way over their heads," says Ann Mays, an Orlando hairdresser. "It can be very healthy for kids to learn how to live frugally. Walking more. Spending more time with the kids. Those are positive things."