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When You Save, Economy Slows

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The Associated Press

Published: February 3, 2009

Consumer spending fell for a record sixth straight month in December as recession-battered households, worried about surging layoffs, boosted savings rates to the highest level since May.

The Commerce Department reported Monday that personal consumption spending dropped by 1 percent in December.

For the year, consumer spending rose by 3.6 percent, the smallest annual increase since 1961. Incomes rose by 3.7 percent, the weakest gain since a 3.2 percent advance in 2003.

Americans are hunkering down and saving more. For a recession-battered economy, it couldn't be happening at a worse time.

Economists call it the "paradox of thrift." What's good for individuals - spending less, saving more - is bad for the economy when everyone does it.

On Friday, the government reported that Americans' savings rate, as a percentage of after-tax incomes, rose to 2.9 percent in the final three months of 2008. That's up sharply from 1.2 percent in the third quarter and less than 1 percent a year ago.

Like a teeter-totter, when the savings rate rises, spending falls. The latter accounts for about 70 percent of economic activity. When consumers refuse to spend, companies cut back, layoffs rise, people pinch pennies even more and recessions deepen.

Some experts say consumers have been so shaken by how fast their wealth has shrunk, so burned by credit card debt, that they might not resume their robust spending for years, if ever.

"People are not saving; they are building financial bomb shelters," said Mark Stevens, who runs a management consulting firm, MSCO, in Rye Brook, N.Y.
PIGGYBANK PARAMETERS

Getting serious about saving? Many are flocking to FDIC-insured bank products such as CDs, but rates are low. Before making any savings choices, says Stuart Ritter, a certified financial planner for T. Rowe Price in Baltimore, people need to be focused on four things:

1. Make sure you either have or are building an emergency fund.

2. Be sure to have the insurance you're supposed to have: health insurance, renters or homeowners insurance, and life insurance if someone else is dependent on your income.

3. Save faithfully for retirement, especially if you have a match.

4. If you have high-interest debt, work on paying that down.

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