Surging US savings reduces dependence on China

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: Saks Fifth Avenue is cutting orders 20% after posting losses in the last four quarters. Kia Harris said that some customers at the Washington shoe store where she worked were buying one pair rather than three. In the recession following a borrowing binge that sent consumer debt to the highest level ever, Americans are shutting their wallets and building their nest eggs at the fastest pace in 15 years. “While the trend will put the country’s finances in better balance and reduce its dependence on Chinese investment, it may also restrain economic growth in 2010 and beyond, said Lyle Gramley, a senior economic adviser with New York-based Soleil Securities Corp and a former Federal Reserve governor. “There’s been a fundamental change in people’s behavior,” he added. “It will affect the economy for years.”

Government data on Sunday showed that the household savings rate rose to 6.9% in May, the highest since December 1993, as personal spending increased less than incomes. The rate in April 2008 was zero. “Most of the rise in income in May was due to one-time government stimulus payments to seniors,” said Nigel Gault, chief US economist at IHS Global Insight in Lexington, Massachusetts. Americans’ newfound frugality is pinching airlines such as Chicago-based UAL Corp, which is cutting staff amid dwindling demand for leisure travel. Donations to charities dropped last year for the first time since 1987, and they’re in danger of declining further in 2009.

Banks are benefiting. Deposits grew 1.7% in May, the ninth-biggest monthly rise since 1973. Nouriel Roubini, an economics professor at New York University and chairman of RGE Monitor, forecasts that the savings rate will ultimately reach 10% - 11%. “What’s critical,” he said, in a Bloomberg Television interview on June 24, “is how quickly it increases.” A rapid rise in the next year because of a collapse in consumption would push the economy, already in its deepest contraction in 50 years, further into recession, the professor said. “If it occurs over a few years, the economy may grow.”