Saks Fifth Avenue is cutting orders 20 per cent after posting losses in the last four quarters. Kia Harris says some customers at the Washington shoe store where she works are buying one pair rather than three.
In the recession following a borrowing binge that sent consumer debt to the highest level ever, Americans are shutting their wallets and building their nest eggs at the fastest pace in 14 years.
While the trend will put the country’s finances in better balance and reduce its dependence on Chinese investment, it may also restrain economic growth in 2010 and beyond, said Lyle Gramley, a senior economic adviser with New York-based Soleil Securities Corp and a former Federal Reserve governor.
“There’s been a fundamental change in people’s behaviour,” he said. “It will affect the economy for years.”
Government data on Friday may show that the household savings rate rose to more than 7 per cent in May from 5.7 per cent in April, as stimulus checks for seniors pushed up income, said Stephen Stanley, chief US economist at RBS Securities Inc in Stamford, Connecticut. The rate in April last year was zero.
Americans’ newfound frugality is pinching airlines such as Chicago-based UAL Corp, which is cutting staff amid dwindling demand for leisure travel. Donations to charities dropped last year for the first time since 1987, and they’re in danger of declining further in 2009.
Banks are benefiting. Deposits grew 1.7 per cent in May, the ninth-biggest monthly rise since 1973.
Nouriel Roubini, an economics professor at New York University and chairman of RGE Monitor, forecasts that the savings rate will ultimately reach 10 per cent to 11 per cent. What’s critical, he said in a Bloomberg Television interview on June 24, is how quickly it increases.
A rapid rise in the next year because of a collapse in consumption would push the economy, already in its deepest contraction in 50 years, further into recession, he said. If it occurs over a few years, the economy may grow.
Dean Maki, chief US economist at Barclays Capital Inc in New York, bets the latter is more likely. “The saving rate will be a weight, not an anchor,” restraining expansion, not stopping it, he said. He sees the economy growing 2.8 per cent next year after contracting 2.5 per cent in 2009.
“The recovery is showing signs of life,” Chris McWilton, president of MasterCard Inc’s US markets, told a conference on June 4. McWilton, whose Purchase, New York-based company has the world’s second-biggest electronic payments network, said the “freefall” in consumer spending has abated.
Americans might already be putting away more than the official figures suggest, Maki said. He expects the government will revise the savings rate higher to reflect more up-to-date data on incomes and consumption when it releases its so-called benchmark economic revisions on July 31.
The bigger cash reserves will lessen US dependence on investment by China and other foreign countries to finance economic growth, Gramley said. The current-account deficit, which includes trade in goods, services and income transfers, narrowed in the first quarter to its lowest since 2001 as Americans saved more and brought fewer imports.
Banks are already gaining from American’s thriftiness. Fed data show that deposits at commercial banks stood at $7.5 trillion in the week ended June 10 after recording the biggest monthly increase of this year in May. “They’re getting cheap deposits,” said Allen Sinai, chief economist at Decision Economics in New York. “It’s part of the healing process.”
From 1960 until 1990, households socked away an average of about 9 per cent of their after-tax income, government figures show. Americans got out of the habit in the 1990s as they saw their wealth build up in other ways, first through surging stock prices and then soaring home values, Gramley said.
That process has now gone into reverse. US household wealth fell by $1.3 trillion in the first quarter of this year, with net worth for households and nonprofit groups reaching the lowest level since 2004, according to a Fed report. Wealth plunged by a record $4.9 trillion in the last quarter of 2008.
Edmund Phelps, winner of the Nobel Prize in economics in 2006 and a professor at Columbia University in New York, said it may take as long as 15 years for households to rebuild what they lost in the recession.
“The only way we’re going to get a healthy, full recovery is over a long period of time, involving households rebuilding their balance sheets,” Phelps said in an interview on June 22 with Bloomberg TV. “There’s no silver bullet that’s going to get us into good shape quickly.”
Retailers are adjusting their strategies to reflect that new reality of a permanently higher savings rate. Saks Inc, Neiman Marcus Group Inc of Dallas and other luxury businesses are reducing orders this year to limit supply and boost profitability.
“Across the board you are going to find less of the sizes, less of the availability in almost all of the categories,” Saks Chief Executive Officer Stephen Sadove said in an interview on June 23. The company, which is based in New York and operates 53 Saks Fifth Avenue stores, is aiming to purchase at least 20 per cent less from its vendors in 2009.
At her ECCO shoe store in Washington, Harris said more products are being discounted. There used to be only two sales per year. Now, the store has a section set aside for an “opportunity corner,” where something is always on sale, she said.
Travel and hospitality companies also are facing up to the change in consumer behavior. UAL’s United Airlines wants to eliminate 600 flight attendant jobs on top of 1,550 cut in 2007.
Marriott International Inc, the biggest US hotel chain, plans to reduce debt by as much as $650 million this year to counter a decline in travel spending.
“The economic conditions in the US and in the world remain pretty difficult,” Carl Berquist, chief financial officer of the Bethesda, Maryland-based company, said on June 2.
Charities are also cutting back, in some cases eliminating staff and programmes, said Del Martin, chair of the Chicago-based Giving USA Foundation.
Without a surge in donations later this year, charitable giving may fall for the second year in a row after dropping to $307.7 billion in 2008 from $314.1 billion in 2007, she said.
Billionaire investor Warren Buffett said it will take time for the US to rebuild its savings and work off debt.
“It’s a slow process, de-leveraging an overleveraged economy, including the consumer,” Buffett, who is chairman and CEO of Omaha, Nebraska-based Berkshire Hathaway Inc, said in a Bloomberg TV interview on June 24. “It can take a while.”
