WASHINGTON The financial crisis has blown a gaping hole in U.S. household wealth, forcing Americans to resume saving the old-fashioned way, and the change in behavior could last well into the next decade.
Flush with paper gains from booming housing and stock markets, consumers spent freely and briefly ran the official saving rate below zero in 2005.
Now consumer anxieties are clearly running high and the trend is reversing. With their view of the future one-year out the dimmest on record, according to a recent Reuters/University of Michigan survey, Americans are saving for the rainy days that may already be here.
The consequences are visible in slow consumer spending, weakening corporate profits, and a steep drop in global trade.
"This is in some respect penance for the reckless spending that took place over the last ten years, spending that was financed by borrowing and by the depletion of savings," said Bernard Baumohl, chief global economist for The Economic Outlook Group in Princeton, New Jersey.
In the final four months of last year, consumers began to ratchet up their saving as a cushion for the future, knowing they could no longer count on rising home and stock prices.
While the rise in saving reflects increased caution, Americans have also enjoyed a lift to their spending power as energy prices dropped, making it easier to sock money away.
"Households have not used their windfall profits from lower gas prices for spending purposes but instead saved a good part of it," said Harm Bandholz, a UniCredit economist.
The saving rate, the difference between what workers earn and what they spend, hit 3.6 percent in December, having drifted gradually upward from a tiny 0.8 percent in August.
It had hit a high for the year of 4.8 percent in May, but that was a temporary surge pumped by tax rebate checks.
According to the Atlanta Federal Reserve Bank, forecasters expect the saving rate to reach nearly 5.0 percent by 2011 "after this recession runs its course."
For years spendthrift Americans have been a locomotive for the global economy, sucking in exports from fast-growing developing nations like China and India. Their newly conservative ways puts pressure on export powerhouses to spur domestic demand.
With the U.S. economy shedding jobs at a rapid clip, the pressure on consumers to curb their spending is only likely to grow.
Baumohl said the saving rate will likely close in on the 5.0 percent to 7.0 percent level seen post-World War II, and that higher rates of saving "could well continue easily for at least the next five years."
"What we'll see is a trend where households are going to be spending more in line with their means," he said.
"They're going to be more responsible and more prudent and more careful about spending so that they do not rely on debt and that they do not spend excessively to the point where they have to dig into their savings to help finance all that spending."
But just because the saving rate is rising, doesn't mean savings necessarily are. It's more that dissaving is ending.
"It may be that folks are paying off debt and are not going further into debt," Wachovia economist Mark Vitner said. "But we are moving in the right direction. Folks got the message and they're changing their lifestyle (and) trying to live within their means."
(Reporting by Nancy Waitz)