Story URL: http://news.medill.northwestern.edu/chicago/news.aspx?id=129161
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SavSpend2

Data: Federal Reserve

Deb Weinstein/MEDILL

Americans have been paying down debt, but economic experts do not agree whether this is a sign of a permanent shift.


SavSpend

 

Chris Gates, 22, says he spends most of his money on basics -- his Oldsmobile and fast food.


Recession forces Americans to save, but will it last?

by Deb Weinstein
May 13, 2009


SavSpend3

 Data: Federal Reserve

Deb Weinstein/

MEDILL

Americans' appetite for debt followed an unbroken upward trend from 2004 through 2008.

Getting a Grip

To cut back on costs does not have mean reducing spending across the board. It can mean scaling back and reshuffling priorities.

 
The following websites offer guidance or tips:

1. Mint.com – Anonymous, private, and free, users provide bank and credit card account information and the site tracks all cash and credit transactions, and then categorizes them to help users see how much of their income they devote to things like groceries and entertainment.

 

2. SmartyPig.com – Set goals, provide account information, and the site diverts funds accordingly. Users can make their goals public, which enables people to contribute to specific goals.

 


3. FeedthePig.org – Supported by American Institute of Certified Public Accountants and the Ad Council. Provides information about saving.

 


4. 360 – This site predated FeedthePig.org and covers a larger swath of age groups and financial advice.




Tina Santos, a Lakeview resident, isn’t eating out as much these days. “I’m learning to cook,” said the 40-year-old, noting that she only buys things if they’re needed and went as far as to change hairdressers to save $40 on her haircuts.

Santos isn't the only one. In the midst of the worst economic crisis since World War II, retail sales fail to rebound as optimists anticipated, slipping 0.4 percent in April, and falling 1.3 percent between February and March as opposed to the initially reported 1.2 percent decline.

If there’s a silver lining to the consumer pullback, economists agree, it’s this: Americans have rediscovered how to save.

The U.S. savings rate fell into negative territory in 2005, the peak year of the housing bubble. But four years and a recession later, the savings rate has risen and now stands at 4.2 percent as of February.

What’s harder to find consensus on is whether the recession, now in its 17th month, is a transitional event like the Great Depression, capable of fundamentally changing how Americans buy and save, or if the cost-cutting that has quieted store registers and glutted stores with inventory is a superficial, short-term trend.

The past two quarters’ statistics on the nation’s gross domestic product, the broadest measure of the U.S. economy, suggested some optimism on the consumer front might be warranted.

U.S. GDP fell 6.1 percent in the first quarter, led by a collapse in business investment. But consumer spending in the quarter rose 2.2 percent – a sharp rebound from the 4.3-percent decline in consumer spending in the fourth quarter of 2008 that resulted in a 6.3-percent plunge in GDP.

For freelance technology coach Holli Buck of Canton, Mich., it took a combination of the recession and a series of layoffs to kick her into savings mode.

“Everyone was talking about ‘how you should have saved’” to prepare for a rainy day, Buck said. So she decided to open a savings account using the online service SmartyPig, which makes authorized, automatic withdrawals from users’ bank accounts each month.

Buck, who said she had never been a saver, noted that it wasn’t because she didn’t want to, but that unexpected expenses always seemed to pop up.

Once again working, but as freelancer with a now-steady workload, Buck said she’s determined to continue saving and is holding onto the recently cultivated habit of scrutinizing her purchases.

“I’m still watching and being mindful of what I spend money on, because you never know. Even with what I’m doing, I could lose my contract, I could have something happen, in the blink of an eye.”

Christopher Gates of Chicago, on the other hand, is struggling with two expenses he can't seem to control: his 1986 Oldsmobile, which uses about $75 dollars of gas a week, and his desire to eat out.  Rather than brown bag it, Gates says he eats out several times a day at least five days a week. "I have bad spending habits," he said.

Evan Woods, adjunct professor economics at Occidental College in Los Angeles, said that saving and spending behaviors are larger than small-focus measures such as whether an individual scours grocery stores for bargains.

“Consumption patterns really respond to incentives, [like those] built into credit card contracts and the availability of credit,” he said, calling the present consumer rollback a “short-term response to the current economic climate.”

Woods said a transformation in shopping behavior would require one of two things: A pronounced recession to cultivate legacy behavior like that linked to the Great Depression, or scrutiny of industries like credit card companies, mortgage brokers and banks that offer consumer incentives.

“People are blaming the individual. It’s ‘We were stupid about credit, we were dumb about housing’ [but] people respond to incentives,” he said, adding, “We need to change the rules regarding these institutions rather than chastise people who were responding in a somewhat rational way” to an environment of easy credit.

Addison Wiggin, executive publisher of the financial newsletter the “Daily Reckoning,” traces the problem to the wealth effect of the 1990s tech bubble, during which people began spending more than they were earning.

“People calculated risk out of their spending habits,” Wiggin said, adding, “I think people are asking a lot of different questions now.”

Wiggin continued “The thing that scares me most is that people’s idea of when it’s going to be over is when they can get back to their old ways of spending and consuming.”

As of the end of the 2008 third quarter, Americans were shouldering $2.58 trillion in debt, up 19 percent from 2004 and a record high, according to the Federal Reserve. Since then, Americans have chipped away at outstanding debt. Consumer credit in the first quarter fell at an annual rate of 2 percent.

Carl George, CEO of Clifton Gunderson LLP, and chairman of the National CPA Financial Literacy Commission, however, worries that Americans have become accustomed to debt.

“Our young people are starting off with bad habits of just charging pizza . . .and that mounts up,” said George, who pointed to a dearth of financial literacy as a major part of the problem.

George and American Institute of Certified Public Accountants, the group behind the financial literacy program Feed the Pig and an earlier iteration, 360 Degrees of Financial Literacy, have been working to make financial tools accessible in the hope that information could help young adults change their spending habits.

George said surveys show that 125,000 people visit Feed the Pig monthly and that 249,000 subscribe to its podcasts. Despite those numbers, George said he thinks financial habits will “take generations” to turn around, and that when he speaks at colleges the idea of saving before spending “does seem like it’s a new concept” for some.

The younger generation is also Wiggin’s greatest concern. “They don’t even know what it’s like to hold cash. They’ve grown up in a massive credit-driven environment.”

According to David Laibson, Harvard University’s Robert I. Goldman Professor of Economics, Americans have to slash personal spending by at least 7.5 percent to establish a sustainable lifestyle.

“I think the thing that’s obvious or likely nobody’s talking about is the fact that the adjustment in our lifestyles has only just begun,” Laibson said, adding that the recession’s long-term imprint will be scaled-back expectations, especially for big-ticket purchases.

You “can’t buy cheaper pizza, but a couch can be half the cost if you replace it half as often,” Laibson said of the 25-to-35-year-old age group.

Those who have already met major life commitments such as private tuition, car payments and mortgages, will need to understand that being free of those commitments will not provide new-found cash, Laibson said.

He added that for people who have already raised their children and are nearing retirement will have to continue to scale back and “give back some of the goodies” to which they’ve become accustomed.

“The mindset of the way that people talk about [economic recovery] is that we need to push a lever here, move some money there,” Wiggin said, noting that recovery from the Great Depression took time and a war.

“It took a good 15 years to rebuild the economy, to retool everything [back then],” he said. Similarly, today, “we’re not going to go back to a massive consumer society any time soon.”