Turmoil May Make Americans Savers, Worsening `Nasty' Recession

By Rich Miller

Oct. 20 (Bloomberg) -- The U.S. may be on its way to becoming a nation of savers, whether Americans like it or not.

With home and stock prices declining and credit hard to come by, consumers who have fallen out of the savings habit are being forced to curb borrowing and rein in spending.

That is bad news for companies catering to them, which will have to retrench as well. Detroit automakers may need to slash costs and merge as Americans hold onto their cars longer. Shopping malls might be forced to shut as retail traffic trails off. Hotels may have to shelve expansion plans as vacationers become stingier with their dollars.

The big concern is that households, spooked by the turmoil in financial markets, will cut back rapidly and sharply, plunging companies into bankruptcy and deepening a recession that many economists say has already begun.

``If we did have a quick cut in spending, it could turn a pretty nasty recession into possibly the worst downturn we've seen in the postwar period,'' says Michael Feroli, a former Federal Reserve official now at JPMorgan Chase & Co. in New York. Even without a collapse of consumer spending, Feroli expects the economy to contract by 2 percent in both this quarter and the next.

There are signs that consumer spending is already giving way. U.S. retail sales fell in September for the third straight month, the longest slump since the government began keeping records in 1992. And consumer confidence as measured by the Reuters/University of Michigan index fell by the most on record this month. Fed Chairman Ben S. Bernanke will give the central bank's latest assessment of the risks to the economy when he testifies before the House Budget Committee today.

`A Quantum Downward Shift'

``We are going through a quantum downward shift in consumer spending,'' says Allen Sinai, chief economist at Decision Economics in New York. ``Any industry that is tied to the consumer will have to downsize and consolidate.''

From 1960 until 1990, households socked away an average of about 9 percent of their after-tax income, Commerce Department figures show. But Americans got out of the saving habit starting in the 1990s as they saw their wealth build up in other ways, first through surging stock prices and later through soaring home values.

Meantime, looser credit standards made it easier for people to afford major purchases without having to save up to pay for them. The result: Since 1990, they have set aside less and spent more, pushing the savings rate down to an average of 3.5 percent. It was less than 1 percent in each of the last three years.

Nosedive

That may be about to change as wealth and credit evaporate. Household net worth, as measured by the Fed, fell $2 trillion in the second quarter from a year earlier -- and that was before the stock market's nosedive wiped about $3.9 trillion off investors' portfolios in the past month and a half.

Credit is also harder to get. Borrowing by U.S. consumers fell in August by $7.9 billion, the most since statistics began in 1943, to $2.58 trillion as lenders curbed access to loans, according to Fed data.

Add to that a cyclical rise in the unemployment rate -- it already stands at a five-year high of 6.1 percent and could increase to 9 percent, according to Microsoft Corp. co-founder Bill Gates -- and it is no wonder households are retrenching.

`A Fantasy World'

``Consumers are starting to realize that they've been living in a fantasy world,'' says Lyle Gramley, a former Fed governor who is now senior economic adviser at Stanford Group Co. in Washington. ``They will have to begin salting away money for retirement, their children's education and other reasons.''

Americans have a way to go to catch up with their counterparts in other countries. The 0.4 percent of disposable income that U.S. households saved last year compares with 10.9 percent for Germany and 3.1 percent for Japan, according to the Paris-based Organization for Economic Cooperation and Development.

In the long run, higher savings would be good news for the U.S. economy, because the extra money would help put household finances on a sounder footing and lessen U.S. dependence on investment by China and other foreign countries to finance economic growth.

In the shorter run, though, it will likely mean wrenching changes for companies that have become reliant on rapidly growing consumer spending. Some firms have already begun cutting back to bring operations in line with lower demand.

Excess Capacity

``Companies built up a lot of capacity,'' says David Wyss, chief economist at Standard & Poor's in New York. ``They may not need all of it.''

The construction industry has been decimated by the collapse of the housing market. At least a dozen homebuilders have sought bankruptcy protection as conditions deteriorated, including billionaire Carl Icahn's WCI Communities Inc., Tousa Inc., Kimball Hill Inc., Levitt & Sons and Neumann Homes Inc.

Automakers are also hurting, especially Detroit's Big Three: General Motors Corp., Ford Motor Co. and Chrysler LLC. U.S. car and truck sales this month may fall to a seasonally adjusted annual rate of 11 million, the lowest in at least 25 years, Deutsche Bank AG analyst Rod Lache wrote in an Oct. 14 note to clients. That compares with a 14.1 million average through the first nine months of this year and a 16.7 million average from 2002 through 2007.

``The industry needs desperately a dramatic rationalization; there are too many plants, too many employees,'' John Casesa, managing partner of Casesa Shapiro Group in New York, said in an interview Oct. 10. ``It will be a radical change: far fewer suppliers, possibly not three U.S. companies, maybe three that become two or one.''

Shuttered Dealerships

As many as 600 new-vehicle dealerships may close or consolidate with others this year, the National Automobile Dealers Association said Sept. 30. That is about 3 percent of the total, and up from 430 last year. ``There are more dealerships out there than there are cars to sell,'' says Paul Taylor, an economist at the McLean, Virginia-based group.

Retailers are also suffering a shakeout. A number have already filed for bankruptcy, including Mattress Discounters Corp., Marty Shoes Inc., cookie-maker Mrs. Fields Famous Brands LLC and Linens 'n Things Inc.

As stores closed, vacancies at neighborhood and community shopping centers rose to a 14-year high in the third quarter, according to New York-based real-estate research firm Reis Inc.

More Trauma

More trauma is likely. The Washington-based National Retail Federation says this may be the worst holiday selling season in six years, with sales rising 2.2 percent in the last two months of the year from the same period in 2007.

``The consumer is dead in the water,'' says Howard Davidowitz, chairman of Davidowitz & Associates, a New York- based retail-consulting and investment-banking firm. ``We expect to see 10,000 to 12,000 stores shut next year,'' on top of almost 8,000 this year.

The tourist industry faces tough times as well. Host Hotels & Resorts Inc., the largest U.S. lodging real-estate investment trust, said third-quarter profit fell 44 percent after cash- strapped consumer and corporate groups cut back on trips to Hawaii. U.S. hotels revenue per available room fell 8.1 percent in the week ended Oct. 11 from a year earlier, according to Smith Travel Research, a Hendersonville, Tennessee-based marketing firm that tracks lodging data.

Not surprisingly, many hospitality companies are putting expansion plans on hold, especially with credit becoming scarcer and costlier. More than $10 billion in hotel and casino projects with a total of 10,000 rooms have been delayed on Las Vegas Boulevard, better known the world over as the Strip, according to locally based real-estate and economic consulting firm Applied Analysis LLC.

They may be on hold for a while. ``The economic and financial crisis will have long-lasting effects on the consumer,'' Gramley says. ``The personal-savings rate is going to increase over the next five to 10 years.''

To contact the reporter on this story: Rich Miller in Washington at rmiller28@bloomberg.net