January 17, 2012 / 3:51 PM / 8 years ago

US recovery at risk as Americans raid savings, borrow again

A piggy bank branded with the logo of the English Premier League soccer club Arsenal is seen in a souvenir shop in London October 18, 2011. REUTERS/Chris Helgren
By Jilian Mincer and Jonathan Spicer
    NEW YORK (Reuters) -    More than four years
after the United States fell into recession, many Americans have
resorted to raiding their savings to get them through the
stop-start economic recovery.
    In an ominous sign for America's economic growth prospects,
workers are paring back contributions to college funds and
growing numbers are borrowing from their retirement accounts. 
    Some policymakers worry that a recent spike in credit card
usage could mean that people, many of whom are struggling on
incomes that have lagged inflation, are taking out new debt just
to meet the costs of day-to-day living.
    American households "have been spending recently in a way
that did not seem in line with income growth. So somehow they've
been doing that through perhaps additional credit card usage,"
Chicago Federal Reserve President Charles Evans said on Friday.
    "If they saw future income and employment increasing
strongly then that would be reasonable. But I don't see that. So
I've been puzzled by this," he said.
    After a few years of relative frugality, the amount of money
that Americans are saving has fallen back to its lowest level
since December 2007 when the recession began. The personal
saving rate dipped in November to 3.5 percent, down from 5.1
percent a year earlier, according to the U.S. Commerce
    Jeff Fielkow, an executive vice president at a recycling
company in Milwaukee, Wisconsin, contributed less to retirement
savings and significantly cut back on dining in restaurants and
taking vacations in order to keep college savings on track for
his two children. "We would love to save more," he said, "but
we're doing the best we can."
    There have been some signs of a quickening in U.S. economic
growth recently after it emerged from recession in mid-2009.  
    Hiring was stronger than forecast in December and confidence
among consumers rose to its highest level in eight months in
    But many see a long, hard slog ahead and economic growth
this year is not expected to be much more than 2.0 percent,
barely up from 2011's growth pace. 
    The big risks include Europe's debt crisis as well as the
shaky finances of many Americans, hit by a five-year decline in
house prices and still high unemployment. U.S. consumers account
for about two thirds of the country's economic output measured
by total spending.
    Retail sales rose at the weakest pace in seven months in
December, according to data published last week.
    Sales in 2012 are expected to grow at slower rate than last
year, an industry group said on Monday. The National Retail
Federation projected sales would rise 3.4 percent this year,
compared with than 4.7 percent in 2011.
    "When the stock market and the housing market were booming,
we saw that a lot of people would take on more debt and save
less. They felt the saving was being done for them," said Mark
Vitner, managing director and senior economist at Wells Fargo
Securities in Charlotte, North Carolina.
    "Today, the saving rate is falling out of necessity. Food
and energy prices have risen and folks don't have as much money
to spend on the things that they would like."
    Just as Americans used to borrow against the value of their
homes before the property crash, now many are taking out loans
from their 401(k) retirement savings plans.
    Almost a third of plan participants currently have a loan
outstanding, according to an upcoming survey of 150,000 holders
of 401(k)s by consulting firm Aon Hewitt.
    "People are at a loss, and they are struggling," said Pam
Hess, director of retirement research at consulting firm Aon
For graphics on the U.S. savings rate, earnings and other
indicators, click on: link.reuters.com/dep95s
    Loans taken from retirement savings accounts jumped 20
percent last year across all demographics, according to a survey
to be published in March. Among lower earners they leapt by as
much as 60 percent, said Aon Hewitt's Hess. The vast majority of
borrowers, she said, need the money for essential expenses like
bills, car repairs and college tuition.
    The non-profit Employee Benefit Research Institute's (EBRI)
annual retirement confidence survey hit a new low in 2011 with
27 percent of workers saying they're "not at all confident"
they'll have enough for a comfortable retirement. Almost 15
percent expect to work until at least the age of 70, up from 11
percent in 2006.
    New York real estate broker Leila Yusuf had been very
conscientious about saving for retirement, typically socking
away $5,000 to $10,000 a year. But her income slid by 30 percent
in the last two years as the housing market hit the doldrums and
she stopped making contributions.
    "I couldn't afford to do it after four deals didn't go
through," said Yusuf, 37. "I need money to live on."
    In another sign of Americans struggling to make ends meet,
EBRI found that more than 20 percent of those aged 50 or older
changed their medical prescriptions to save money and almost as
many had skipped or postponed doctor appointments for the same
reason. Almost 28 percent reported having difficulty paying
their monthly bills.
    The amount of money Americans put aside for their children's
college fees is taking a hit too. Assets in the popular
state-managed college savings funds known as 529s dipped more
than 10 percent in the third quarter of 2011. Estimated outflows
were $354 million between July and September contrasted with
inflows of $927 million in the same period of 2010, according to
Financial Research Corp.
    Indicative of the trend, contributions to the 529 plans
managed by investment management firm Vanguard dropped 1.0
percent in 2011 after climbing 17 percent from 2009 to 2010.
Parents of younger children are continuing to save, according to
Vanguard, "but they may be concerned about the economy and
market conditions and have cut back a little."
    At the same time, college students are borrowing twice as
much as they did a decade ago when adjusted for inflation,
according to the College Board, and Americans now owe more on
student loans than on credit cards. 
    Household borrowing on cards, car loans, student loans and
other installment debt jumped almost 10 percent from October to
November, according to the Federal Reserve, its biggest jump in
a decade. 
    Welcomed by some as a sign of confidence in the economic
recovery, others worried it was really a reflection of
    "Apparent stronger consumption at year-end was associated
with falling savings rates, compensating for stagnating income
growth," Dennis Lockhart, president of the Federal Reserve Bank
of Atlanta said on January 11. 
    "I question whether this consumer spending momentum will be
sustained without a pickup in income growth."
    In a sign of concern among policymakers about the weak
finances of many Americans, the Federal Reserve this month
suggested an array of ways the U.S. government could help shore
up the housing market. 
    House prices have fallen 33 percent from their 2006 peak,
resulting in an estimated $7 trillion in household wealth losses
and about 12 million homeowners are saddled with mortgages worth
more than their properties.  
    Americans are steadily working off their overall debt
levels, including their mortgages. Credit card balances, while
little changed compared to a year ago, are down 18 percent from
a peak in September 2008.
    "It's not like it was a year or two ago when it really felt
like a recession, and there was no job growth," said Scott Hoyt,
a senior director of consumer economics at Moody's Analytics.
"It's better than that and you can see that in the spending. But
there's still no reason to go back to the free-spending days
prior to the recession."
    "Americans are still coming to terms with fact they're not
going to earn as much income as they once thought and they are
not going to have as much wealth," said Vitner at Wells Fargo.
"They are now trying to work out how they are going to have to
adjust their lifestyle to fit that."

 (Additional reporting by Phil Wahba; Editing by William
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