Americans discover newfound frugality
Most of us go through life hearing that the key to wealth is through prudent financial strategy: Live below your means; save money, especially for retirement, and be prepared for any calamity. Yet few people heeded that advice, judging from consumers' paltry savings rate.
People are paying attention now. Consumers are spending less, which caused retail sales to fall nearly 10 percent in December. True, we have less money to spend, as disposable income fell 0.2 percent for that month. Yet it's also from a saving rate that rose to 3.6 percent. That may not seem like much, but consider that between 2005 and 2008 the savings rate was less than 1 percent. At one point in 2005 we actually had a negative savings rate.
The result has been devastating for any company that sells higher-priced goods or services considered luxuries - with a few notable exceptions such as video games. High-end department stores have been hit hard. Hotels are seeing less business. Sellers of electronics have fewer customers.
Casual-dining restaurants are closing. In their wake, everyone is trying to target the suddenly penny-pinching consumer - restaurants from the drive-in chain Sonic to swank New York City establishments are offering lower-priced menu items.
It's ironic that financial prudence is bad for the economy. Yet the shift from spending to saving is, indeed, exacerbating the pain already being felt in the form of rising unemployment. It also creates headaches for policy makers, because traditional government strategies to stimulate spending just don't work that well.
But over the long-term, a higher-savings rate will keep the economy from collapsing the next time it faces a stiff wind, providing consumers with a buffer to protect them from pay cuts or job losses or inflation.
Prudence will win the day in the end - presuming that consumers stick with their newfound frugality.