Americans embrace saving as nest eggs shatter

By Emily Kaiser - Analysis

WASHINGTON (Reuters) - Americans who were banking on soaring home and stock prices to finance their retirement will have to go back to saving the old-fashioned way, ushering in a new era of frugality that may last for years.

For much of this decade, easy credit that helped inflate the housing bubble and boost financial markets meant households did not need to set aside as much for a rainy day. Spending accelerated while the savings rate declined to near zero.

The trend is reversing now that the financial upheaval has blown a $7 trillion hole in Americans' wealth. Households are curbing spending at the sharpest rate on record, and economists see only a tepid rebound beginning late next year.

"The golden age of spending for the American consumer has ended, and a new age of thrift likely has begun," said Richard Berner, U.S. economist with Morgan Stanley.

"This recession is more than a cyclical event; we think it will trigger a sea-change in consumer spending behavior as consumers now embark on a long period of rebuilding thrift."

As recently as the early 1980s, U.S. households were socking away about 10 cents out of every dollar to cover emergencies or save for retirement.

By 2005 the saving rate was below 1 percent, thanks largely to higher returns on investment in the stock market and real estate, and financial innovation that made borrowing easier.

Joseph Lupton, an economist at JPMorgan in New York, expects savings to climb by 4 percentage points by the end of 2009, from 0.2 percent at the start of 2008. That would represent the sharpest eight-quarter rise in 50 years.

It reached 1.3 percent in the third quarter.

CHASTITY LATER

Flush with investment wealth, consumers stepped up spending over this decade, even though wage growth remained tepid.

Imports soared, particularly from China, driving up both U.S. deficits and Chinese surpluses. From the start of the housing market boom in 2002 through 2007, imports from China rose by 157 percent to $321.4 billion.

Economists have long warned that these trends were unsustainable, and Americans would eventually need to curb consumption while China boosted its own domestic demand.

The credit crisis is doing precisely that, but at such breakneck speed that it is worsening an already grim economic outlook. The global economy simply cannot adjust fast enough to the sudden drop in U.S. demand.

U.S. retail sales have fallen for four consecutive months, culminating in October's record large 2.8 percent decline. China has announced a nearly $600 billion plan to boost internal growth. The global economy is bracing for recession.