Recession Lesson: Consumers Shift Toward Saving

Spending and saving behaviors adopted during the recession may usher in a "new fiscal conservatism" by American households, according to a poll by Consumer Reports.

After weathering a long and severe recession, consumers may be inclined to put their own books under the microscope — akin to what financial analysts routinely do when they scrutinize companies.

"I think that for very many people the downturn in the economy was just a major wake-up call," says Noreen Perrotta, money editor for Consumer Reports. "People had been spending more than they could afford to."

Future Financial Behaviors

So what new financial behaviors are likely to endure after the Great Recession? The Consumer Reports poll found that 44 percent of people said they'll continue to buy only what they absolutely need. Consumers also said they'll continue to put less on credit cards (42 percent), invest more conservatively (38 percent), and put more money toward savings (35 percent).

The poll offers a snapshot of what's to come, and the outlook isn't rosy for retailers heading toward the holiday shopping season. "Consumer confidence has really dived in the past several months along with a very substantial cutback in retail spending," says Ed Farrell, director of the Consumer Reports National Research Center. "People who are still working just aren't spending."

Farrell says consumers continue to search for a safe haven and therefore are putting their money into savings rather than the stock market.

"There's this widely held view that people were being irresponsible spendthrifts," says economist Dean Baker of the Center for Economic and Policy Research. "It wasn't irresponsible if the money people had in their homes was real."

After the Great Depression, many people didn't want to put money back into the stock market. Baker says it would be unfortunate if today, people took a similar stance and opted to invest only in bonds or money market accounts. "They'd be forgoing a much higher return," he says.

The personal savings rate has been on the rise in 2009, according to the Bureau of Economic Analysis.

The Consumer Reports poll, which was completed at the beginning of August, reveals that during the past year consumers implemented a number of behavioral changes in order to cope. These included going out to dinner less often and spending less on vacations.

"Over the last couple of decades people's attitudes have been that they don't need savings and if they run into financial difficulty they can fall back on credit," says Dennis Jacobe, chief economist for Gallup, which conducts its own polls. "In this recession, all of a sudden people saw that those credit lines disappeared."

Spend Or Save?

The debate over whether it's better to spend or save during economic downturns also took on a new dimension during this recession because of its severity. Jacobe says past recessions were cyclical, mirroring past downturns since World War II. But this time around, credit dried up, unemployment rose and consumers were also exposed to plummeting housing values, investments and retirement accounts.

He says as part of the trend toward fiscal conservatism, consumers are returning to financial principles that were in vogue three decades ago: keeping an emergency savings account that would sustain a person and his family for six months; spending no more than 25 percent of income on a mortgage; and keeping debt under control.

"About a third of consumers think that they're going to be spending less on an extended basis," Jacobe says. There's also evidence of an accompanying shift in consumer attitude: According to Gallup, 58 percent of the population this year said they enjoy saving more than spending, up from 53 percent at the end of 2008.

"We may go back to a simpler concept where you save your money before you buy something rather than pay it off over time," Perrotta says. Consumer Reports calls this "intelligent thrift," and it's what may replace "credit-driven spending."

Still, even though people are desperate to get out of debt, Perrotta says it remains to be seen whether Americans stick with these new patterns of financial behavior once things improve.

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