Decline in American Spending Leads to Savings Growth

Since the summer of last year, Americans have been steadily cutting expenses and contributing more to their savings. In the midst of rampant job losses, a frozen credit market and the worst recession since the one leading to the Great Depression, it comes as no surprise that many households are attempting to bulk up their savings and open savings accounts.

According to a U.S. Commerce Department report, consumer spending fell a full percentage point in December, a further drop from November’s 0.8% decline. In contrast, the American savings rate rose to 2.9% in the last three months of 2008. The downward spiral in spending has led to a contraction in the economy, which in turn causes companies to cut production and lay off more workers, contributing further to the vicious cycle.

Economists do not agree on whether or not a growing savings rate for Americans will be beneficial for the economy in the long run. In the short term, it definitely hurts. Experts say there will be a behavioral shift towards a Depression-era mindset, where consumers will save aggressively and spend conservatively. Japan, which experienced its own “lost decade” due to a massive credit bubble, was far better off than Americans today due to a high savings rate per family.

How are you cutting expenses and saving more in this economy?