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Americans tightening belts

More consumers are trimming spending and debt because their net worth has fallen fast.

By Ron Scherer | Staff writer of The Christian Science Monitor

from the October 10, 2008 edition

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New York - 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.

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