more personal saving would be a positive step in the long run, analysts say. More saving leads to more investment

TO BE NOTED: From the NY Times:

Copyright 2009 The New York Times Company

"Shift to Saving May Be Downturn’s Lasting Impact

By CATHERINE RAMPELL

The economic downturn is forcing a return to a culture of thrift that many economists say could last well beyond the inevitable recovery.

This is not because Americans have suddenly become more financially virtuous or have learned the error of their free-spending ways. Instead, these experts say, Americans may have no choice but to continue pinching pennies.

This shift back to thrift may seem to be a healthy change for a consumer class known for spending more than it earns, but there is a downside: American businesses have become so dependent on consumer spending that any pullback sends ripples through the economy.

Fearful of job losses and anxious over housing and stock declines, Americans are squirreling away more of their paychecks than they were before the recession. In the last year, the savings rate — the percentage of after-tax income that people do not spend — has risen to above 4 percent, from virtually zero.

This happens in nearly every recession, and the effect is usually fleeting. Once the economy recovers, Americans revert to more spending and less saving. Over the last 30 years, the savings rate has fluctuated from over 14 percent in the 1970s to negative 2.7 percent in 2005, meaning Americans were spending more than they made.

This time is expected to be different, because the forces that enabled and even egged on consumers to save less and spend more — easy credit and skyrocketing asset values — could be permanently altered by the financial crisis that spun the economy into recession.

“I expect that the savings rate will end up at the end of this recession higher than it was going into it,” said Jonathan A. Parker, a finance professor at the Kellogg School of Management at Northwestern University. “It’s hard to see how it wouldn’t.”

Sustained increases in household saving would cause a difficult period of restructuring for the American economy, which has become increasingly driven by consumer spending. Such spending makes up about 70 percent of the nation’s gross domestic product.

Add the decline in consumer spending to the planned expiration of government stimulus spending, and a painful readjustment in demand for goods and services could occur, economists say. The effect would be felt here and abroad, as many developing economies also depend on America’s big-spending ways.

“If Americans cut back, as they almost have to do, what will replace that source of demand?” asked William G. Gale, director of the economic studies program at the Brookings Institution, a liberal-centrist policy research group.

“The easy answer is the Chinese consumer,” he said, but unlike their more prodigal American counterparts, the Chinese save about a quarter of what they earn. “We may cut back faster than they expand into that space, so there might be a lull.”

Why might the higher savings rate outlast the recession?

Social critics like David Blankenhorn, president of the Institute for American Values, hope that introspection about America’s “culture of consumption” will awaken Americans to the virtues of thrift, just as the Great Depression reset American financial values for a generation.

But many economists believe consumers will change their habits for more pragmatic reasons.

Consumers have lost a huge chunk of their net worth, in the housing bust and the stock market, and to resuscitate their retirement accounts or children’s college funds they will have to channel more of their paychecks toward saving — unless those asset markets soar again.

Forms of easy credit that were once prevalent, like mortgages with no down payments, also may not return, either because the government regulates them out of existence or because banks dare not venture back into such risky lending. That means if Americans want to buy a house, they will have to save more and borrow less.

Whether for reasons moral or otherwise, consumers are already thinking a bit differently about their long-term budgets. A recent Pew Research Center survey found that many more Americans had begun regarding products like microwave ovens as luxuries rather than necessities.

Such attitudes suggest that retailers will have to change their marketing strategies, said J. Walker Smith, executive vice chairman of the Futures Company, a marketing and research consultancy.

“People are realizing they can’t accumulate everything they want anymore, and they’ll have to prioritize more,” he said. “That may be hard for a lot of brands — figuring out not only how to get considered by consumers, but put at the top of their list.”

Consumers planning big purchases are also anticipating that their borrowing options will remain limited.

Last year, Aryn Kennedy and her husband, Brian Ewing, who live in Los Angeles, spent “every dollar” they earned on debt repayment and living expenses. When local housing prices began to fall, Mr. Ewing toyed with the idea of a low-down-payment mortgage.

“By the time we really started looking at buying, I knew from reading blogs that most loans like that were not really available anymore, since lenders didn’t want to take risks,” said Ms. Kennedy, who said she was suspicious of such offers anyhow.

Since then, through “windfalls” like a salary increase for Mr. Ewing, and by cutting expenses for clothing, entertainment and other items, Ms. Kennedy says the couple has begun saving about 25 percent of their take-home pay in anticipation of making a traditional down payment of 20 percent on a house.

Even after they buy, Ms. Kennedy said, the couple plans to keep saving 25 percent of their pay. A recent Gallup poll found that most Americans who have recently increased their savings believe their budget adjustments represent a “new, normal pattern for years ahead.”

Despite the immediate jolt to the economy, more personal saving would be a positive step in the long run, analysts say. More saving leads to more investment, which promotes economic growth, which leads to better living standards.

At the family level, social critics, economists and even many consumers seem to agree that a forced financial conservatism may be for the better.

Kenny Tran of Santa Ana, Calif., for example, said he had been nervous about saving enough to buy his first house — he and his fiancé have been setting aside about $800 a month for the last year and a half — but he has no regrets about not buying a home when credit was looser and saving was less of a priority.

“A couple years ago it would have been easier for us to get a loan,” despite the fact that the couple’s combined income was lower, Mr. Tran said. “But if we would have gotten a loan, and a house, a couple years ago, we’d probably have ended up in foreclosure now.”

There are several factors holding back the Chinese consumer

TO BE NOTED: From the FT:

"China’s consumption is a disappearing act

Published: April 8 2009 19:46 | Last updated: April 8 2009 19:46

In January, a remarkable thing happened: more cars were bought in China, the land of bicycles, than in the US, the land of – well – cars. US annual light vehicle sales skidded below 10m, fewer than in China where January sales ran at 10.7m a year. For those counting on the Chinese consumer to ride to the world’s rescue, here, surely, was the news they had been waiting for.

Unfortunately, those vehicle numbers were not quite what they seemed. Nor – not yet, at least – is the Chinese consumer.

It turns out that China and the US count cars differently and that China’s numbers were temporarily flattered by the lunar new year. Still, China remains a bright spot in the thickening gloom. Other industries too are counting on the Middle Kingdom, the largest market for television sets and mobile phones, steel and cement. Shiseido, a Japanese cosmetics company, has been racking up 30 per cent Chinese sales growth. Alex Salmond, Scotland’s first minister, on a clean-energy-to-whisky sales tour of China this week, revealed there were more cashed-up Chinese than American students in Scottish universities.

The 19th-century Englishman who mused that, if every Chinese lengthened his shirttail by a foot, textile mills would spin year-round, has been replaced by 21st-century westerners hoping that Chinese will step in to buy their sedans and insurance products. But can they?

The picture is not easy to decipher. By some measures, Chinese consumers have in fact become relatively less important. In the 1980s, household consumption averaged slightly more than half China’s gross domestic product. That proportion fell in the 1990s to 46 per cent, reached 38 per cent by 2005 and is about 35 per cent today. By comparison, in 2007 US household consumption was running at what we now know was an unsustainable 72 per cent of GDP.

Andy Rothman, China strategist at CLSA, says people should not get hung up on that comparison. Just as in 1950s Japan, he says, a much bigger share of China’s GDP is today going to investment, something that changed in Japan only in the 1960s when consumers began to buy fridges and washing machines. Consumption rates tend to be higher in poorer countries than China where people spend a large part of their income to survive, and richer ones where discretionary spending takes hold.

Jonathan Garner, emerging markets strategist at Morgan Stanley, is another believer. In his 2005 The Rise of the Chinese Consumer, he predicted that by 2014 Chinese consumption would have risen from 9 per cent of US and 3 per cent of world consumption in 2004 to 37 per cent and 10.5 per cent respectively. By then, he forecast, the Chinese shopper would have displaced the US consumer “as the engine of world growth”. He says his prediction is still on track.

Nicholas Lardy at the Peterson Institute in Washington is more circumspect. He applauds Beijing’s attempt to rebalance a lopsided economy that is too dependent on capital investment and external demand. But so far, it has not worked. Investment probably reached a high of 43.5 per cent of GDP in 2008.

There are several factors holding back the Chinese consumer. First, people have for years witnessed the destruction of the “iron rice bowl”, as once-free health and education systems have been dismantled. Now the government is committed rhetorically – and, increasingly, in practice – to rebuilding the social safety net. But it will be years before people trust the state to look after them, and run down their precautionary savings.

Second, most Chinese are what Dragonomics, a research firm, calls “survivors”, whose purchases of basic food and clothing are meaningless for multinationals or global demand. Only about 150m are part of “consuming China”, although this may double to 300m by 2015. Consuming China’s median household income is about $6,000, against $45,000 in the US. The owner of a Beijing car does not spend like the owner of a Boston car.

Finally, China’s recent consumption boom has been predicated on rising income, itself a function of strong external demand. Growth should continue at 7-8 per cent, but the days of double-digit expansion may be over. So, rather than accelerate, Chinese household purchases may in fact slow. It turns out that Americans have been paying for everything with credit – even Chinese consumption."