Now in vogue: saving

Earlier this decade, when many Americans were racing to grab fancy cars and larger houses, they also loaded up on debt.

In those go-go spending days, the personal savings rate – the percentage of current disposable income that's not spent in the current period – was less than 1 percent each year from 2005 to 2007, according to the Commerce Department's Bureau of Economic Analysis (BEA).

Indeed, last year's 0.6 percent savings rate meant that, on average, 99.4 percent of Americans' disposable income was being spent.

But with a host of financial shocks hitting Wall Street and Main Street – a recession, rising job losses, tumbling real estate and stock values – attitudes toward savings are changing. "We're going to start being moderate savers and not live beyond our means," says David Wyss, chief economist at Standard & Poor's Corp.

Moreover, he expects that behavior to last until the "economy has stayed good enough for long enough" for people to forget what has happened, especially to the value of their homes and equities. "Normally, it takes around 10 years of steady economic gains for them to forget" any economic woes that they've endured, Mr. Wyss says.

Already this year, the personal savings rate has shown some flickers of improvement. According to the BEA, the rate was a paltry 0.2 percent in the first quarter, jumped to 2.5 percent in the second quarter with the help of tax rebate payments, and fell to 1.1 percent in the third quarter. In October, however, the monthly personal savings rate was 2.4 percent. November's figure is to be released Dec. 24.

Mr. Wyss figures that if Washington includes another round of tax-rebate checks in its expected economic stimulus package, the savings rate could pop up to 6.5 percent after the checks are mailed. After that, he expects the rate to ease to about 4 percent by 2010 – "still low by worldwide standards," he says. "People will stop living beyond their means, but not by too much."

For his part, Bill Hampel, chief economist at the Credit Union National Association, foresees the savings rate "heading back to the 5 to 10 percent level, although it should take several years to get there."

To restore household savings, he explains, "Spending needs to rise less than income for some time."

The savings rate wallowed for much of this decade because "a lot of folks were spending more than their income – not so much by drawing down savings deposits but by borrowing," Mr. Hampel points out.

Evidently, many Americans felt comfortable with hefty borrowing because they'd seen their homes and stock portfolios rise in value. They thought those trends were doing their saving for them. And that, in turn, "reduced the need for them to save money from their incomes," explains Martha Starr, economics professor at American University in Washington, D.C.

But the recent stock-market crash and housing-price downswing has taken a sizable financial toll: Household net worth fell by 11 percent in the year ending in September, according to Federal Reserve data. That loss of wealth could take years to rebuild. Add to that tightened credit conditions. So even if some people did wish to borrow to spend beyond their means, they may be unable to do so.

"[The] two factors making the big difference this time are that lenders will be more cautious and won't lend to just anyone and that homeowners will be more cautious" about spending, holds Hampel.

Moreover, many investors aren't eyeing the stock market with much hope right now, Wyss suggests. "Between 1982 and 2000, we had an almost continuous bull market, with minor corrections. People thought that, if the market went down [one year] it would go back up the next," he says.

But in this decade through 2007, the S&P 500 stock index went nowhere, closing last year at almost the same level as at the end of 1999. And of course, this year, the market has tumbled.

As a result, "people are reaching the conclusion that the market is not their friend anymore," Wyss says. "People are now looking at the stock market the way they did in the 1970s – that you can't rely on it."

While some economists see pressing needs for people to save, they hope consumers will not just shut off the spending spigot. "Although households [do] need to save more now, if they make that adjustment too rapidly, it could prolong or deepen the recession," Hampel points out.

When the recession does end, consumers are likely to resume buying, some economists say. Few are likely to splurge. That could mean the days of buying supersized houses and high-end cars will probably remain in the rearview mirror.