Surging US savings reduces dependence on China

Written by Bloomberg | Updated: Jun 30 2009, 04:49am hrs
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 countrys 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. Theres been a fundamental change in peoples 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 theyre 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%. Whats 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.

Dean Maki, chief US economist at Barclays Capital Inc in New York, bets the latter is more likely. The saving rate will be a weight, not an anchor, restraining expansion, not stopping it, he said. He sees the economy growing 2.8% in 2010 after contracting 25% in 2009. The recovery is showing signs of life, Chris McWilton, president of MasterCard Incs US markets, told a conference on June 4. McWilton, whose Purchase, New York-based company has the worlds second-biggest electronic payments network, said the freefall in consumer spending has abated. Americans might already be putting away more than the official figures suggest, Maki said. He expects the government will revise the savings rate higher to reflect more up-to-date data on incomes and consumption when it releases its so-called benchmark economic revisions on July 31.

The bigger cash reserves will lessen US dependence on investment by China and other foreign countries to finance economic growth, Gramley said. The current-account deficit, which includes trade in goods, services and income transfers, narrowed in the first quarter to its lowest since 2001 as Americans saved more and brought fewer imports. Banks are already gaining from Americans thriftiness. Fed data shows that deposits at commercial banks stood at $7.5 trillion in the week ended June 10 after recording the biggest monthly increase of 2009 in May. Theyre getting cheap deposits, said Allen Sinai, chief economist at Decision Economics in New York. Its part of the healing process.

From 1960 until 1990, households socked away an average of about 9 percent of their after-tax income, government figures show. Americans got out of the habit in the 1990s as they saw their wealth build up in other ways, first through surging stock prices and then soaring home values, Gramley said. That process has now gone into reverse. US household wealth fell by $1.3 trillion in the first quarter of this year, with net worth for households and nonprofit groups reaching the lowest level since 2004, according to a Fed report. Wealth plunged by a record $4.9 trillion in the last quarter of 2008. Edmund Phelps , winner of the Nobel Prize in economics in 2006 and a professor at Columbia University in New York, said it may take as long as 15 years for households to rebuild what they lost in the recession.

The only way were going to get a healthy, full recovery is over a long period of time, involving households rebuilding their balance sheets, Phelps said in an interview on June 22 with Bloomberg TV. Theres no silver bullet thats going to get us into good shape quickly. Retailers are adjusting their strategies to reflect that new reality of a permanently higher savings rate. Saks Inc, Neiman Marcus Group Inc of Dallas and other luxury businesses are reducing orders this year to limit supply and boost profitability.

Across the board you are going to find less of the sizes, less of the availability in almost all of the categories, Saks CEO Stephen Sadove said in an interview on June 23. The company, which is based in New York and operates 53 Saks Fifth Avenue stores, is aiming to purchase at least 20% less from its vendors in 2009. At her ECCO shoe store in Washington, Harris said that more products were being discounted. There used to be only two sales per year. Now, the store has a section set aside for an opportunity corner, where something is always on sale, she said.

Travel and hospitality companies also are facing up to the change in consumer behavior. UALs United Airlines wants to eliminate 600 flight attendant jobs on top of 1,550 who were laid off in 2007. Marriott International Inc, the biggest US hotel chain, plans to reduce debt by as much as $650 million in 2009 to counter a decline in travel spending. The economic conditions in the US and in the world remain pretty difficult, Carl Berquist, chief financial officer of the Bethesda, Maryland-based company, said on June 2. Charities are also cutting back, in some cases eliminating staff and programs, said Del Martin, chair of the Chicago-based Giving USA Foundation. Without a surge in donations later in 2009, charitable giving may fall for the second year in a row after dropping to $307.7 billion in 2008 from $314.1 billion in 2007, she added.

Billionaire investor Warren Buffett said it would take time for the US to rebuild its savings and work off debt.