Turmoil may create more savers, dampen business

The U.S. 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. Even without a collapse of consumer spending, Feroli expects the economy to contract by 2 percent in both this quarter and the next.
There are signs that consumer spending is already giving way. U.S. 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.”
Since 1990, consumers 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. Household net worth, as measured by the Fed, fell $2 trillion in the second quarter from a year earlier – and that was before the stock market’s nosedive wiped about $3.9 trillion off investors’ portfolios in the past month and a half.
Credit is also harder to get. Borrowing by U.S. consumers fell in August by $7.9 billion to $2.58 trillion as lenders curbed access to loans, according to Fed data. It was the biggest decline since statistics began in 1943.
“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.”
Americans have a way to go to catch up with their counterparts in other countries. The 0.4 percent of disposable income that U.S. households saved last year compares with 10.9 percent for Germany and 3.1 percent for Japan, according to the Paris-based Organization for Economic Cooperation and Development.
In the long run, higher savings would be good news for the U.S. economy, because the extra money would help put household finances on a sounder footing and lessen U.S. dependence on investment by China and other foreign 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. Some firms have already begun cutting back to bring operations in line with lower demand.
“The consumer is dead in the water,” said Howard Davidowitz, chairman of Davidowitz & Associates, a New York-based retail-consulting and investment-banking firm. “We expect to see 10,000 to 12,000 stores shut next year,” on top of almost 8,000 this year, he says. &#8226