Consumers take a breather from spending spree

From the malls of San Francisco to the shops of New York City, US consumers have been storming the cash registers and spending their paychecks instead of saving them. But lately they seem to be taking a breather, pausing to regroup personal finances while they wait to see how the economy will perform.

After pushing their personal savings rate down to among the lowest in the world, Americans seem to have started pushing it back up again.

In turn, by holding on to more of their money, consumers may ensure an economic slowdown over the summer.

Bank analysts say consumer purchases, spurred by auto rebate offers, were a major reason for the economy's surprising first-quarter strength. While those plucky customers were snatching up sedans and toaster ovens they were only saving 4.7 percent of their disposable income -- well below 1980's average 5.6 percent.

But in March, the last month of the quarter, consumers started to squirrel away a bit more cash in the bank (or money market fund), raising the rate slightly to 4.9 percent. Then in April the personal savings rate jumped more, to 5.3 percent, and consumer spending went essentially flat -- rising only 0.2 percent, according to Department of Commerce figures.

Has the country taken to heart President Reagan's inaugural address admonition that we are living beyond our means? Will thrift become fashionable, like quiche and the preppie look?

If so, the US savings rate still has a long way to climb out of the hole it has dropped into. From the late 1940s to the mid- '70s, it averaged close to 7 percent.

"I don't think two months makes a trend," says Richard Rahn, chief economist of the Chamber of Commerce of the United States. "But it's clear [consumers] could not continue spending the way they were."

Economists say the average customer almost has to save more, as the burst of spending has depleted many bank accounts.

"I'm looking at this upward drift as a signal of what's to come," says Sandra Shaber, director of consumer marketing surveys at Chase Econometrics.

She predicts the savings rate will stay steady over the summer. If a tax cut can dodge would-be tacklers and make it through Congress, personal savings could increase a bit more, but not as much as the administration thinks it will, she says.

Uncertainty about the state of the economy will keep the savings rate slowly rising over the next year and half, says Allen Sinai, vice-president and senior economist at Data Resources Inc.

"Consumers are finding it harder to qualify for loans," he says, and are being forced into saving more a bit against their will. High interest rates have also raised the real, after- tax cost of borrowing -- so it no longer pays to pile up debts and repay them in inflation-cheapened dollars.

And since the black clouds of inflation appear to be clearing, at least for the moment, Mr. Sinai says the let's-buy-it- now-because-who-knows-what-it-will-cost-next-week attitude isn't as pervasive as it used to be.

Sandra Shaber says this "hedge buying" component of the first quarter's spending surge didn't mean consumers were buying luxuries before they could afford them.

"What people have done, given the erosion of their purchasing power, is resist a decrease in their standard of living," she says.

But consumers can't keep up the pace. They have to pull back, and as consumer spending falls off, so may gross national product growth.

"At least in the short term, given the importance of consumer spending, fluctuations in the savings rate make a big difference in the GNP," she continued.

Lately there has been much hand-wringing over America's relatively spendthrift ways. The US League of Savings Associations point out that the United States was one of only three industrialized nations whose personal savings rate went down during the second half of the 1970s. In England, the decade's average was 13 percent, compared with 6.8 percent in the US. In Japan, it was 20 percent, and in Switzerland it was a whopping 31.4 percent, according to the league.

"The declining personal savings rate of Americans is a clear indication that the federal government should enact meaningful tax incentives to encourage saving -- and help increase capital formation," says Rollin Barnard, president of the US League of Savings Associations.

While there is no question the US just doesn't stuff as large a proportion of income in its national mattress as other nations, many economists say the gap isn't as wide as it looks.

Over the years many a family has "saved" by putting money into a house, for instance.

"Personal savings is a relatively small fraction of total savings," says Dale Jorgenson, a professor of economics at Harvard University. If you look at a nation's capital goods -- the end result of a total savings rate that included corporate cash -- the US is "still the most capital-intensive society in the world," says Professor Jorgenson.

The savings rate is growing faster in nations such as Taiwan and Korea because their economies aren't as product saturated as America's. The potential rewards for a venture capitalist are very great.

"The most important thing [in determining the savings rate of different countries] is the before-tax rate of return. It's very high in undeveloped structures. That's the driving force," says Professor Jorgenson, who adds that changes in America's tax system won't result in more lumps of capital being formed.