The trend toward saving that has been particularly evident in the United Kingdom and northwest Europe is also happening in the United States. The U.S. savings rate has gone up from 1 percent a year ago to 3 percent. This means that Americans are spending 97 percent of their incomes instead of 99 percent.
It’s not a big difference in spending — most of the decline in consumer spending is because of layoffs, pay cuts, and investment declines reducing people’s incomes — but it turns into an enormous difference in financial well-being. If you are in debt, for example, going from a 1 percent savings rate to a 3 percent savings rate means you are paying off your debts three times as fast.
Most of the increase in savings is happening because consumers are feeling cautious and holding off on making major purchases. The difference in behavior is so slight that people might not realize they are doing anything different. Changes in habits can be especially hard to notice when other people are making the same changes. These are some of the changes people are making that result in decreased spending:
- People used to buy a new computer every three years. Now it is more like every four years. That’s a 25 percent decrease in spending.
- A new generation of video games, such as Rock Band, Guitar Hero, and Wii Fit, is more engaging than previous games. Players are spending more time on video games but buying fewer games. Spending on video games has declined by more than 10 percent.
- Observers of the automobile market say the pattern of replacing a car with a new car every three to five years has been permanently broken, and drivers now may replace cars based on need rather than habit. If that means a new car every eight to ten years, that would be a 55 percent decline in spending in that area.
- Some of the hottest designer handbags of two years ago have gone out of style, and no new bag design has come along to take their place. If people are going to buy just any old bag this year, that’s a decline in spending of about 95 percent.
Some say frugality is in style, but the decline in spending rates isn’t really a matter of style. Consumers are forced to be more cautious, knowing that the system won’t necessarily take care of them. In some cases, banks are forcing consumers to save by cutting credit limits. No one should hold their breath waiting for consumers to go back to spending around 99 percent of their incomes. Many survivors of the Great Depression remained frugal for the rest of their lives. Those who get through the current economic adjustment probably won’t become that kind of frugal, but they may never go back to living on the edge.
