Frugality Forged in Today's Recession Has Potential to Outlast It

With their jobs less secure, their houses worth less and their stock-market portfolios shrunken, Americans are saving more now. But will they still be thrifty when the recession ends?

No one will know for sure for years, but there's good reason to believe Americans will be saving more in the next decade than they did in the last one. "It's hard to believe we're ever going back to the easy credit and free spending of the last 10 years," said economist Richard Berner of Morgan Stanley. He predicts consumer spending will grow at an inflation-adjusted 2% to 2.5% annual rate over the next several years, compared with 3.5% in the decade ended in 2007.

That means trouble for retailers, restaurants and luxury-goods makers that rely on U.S. consumers. But it could also restore some balance to a world economy that has relied -- too much, many economists say -- on Americans' debt-fueled spending and emerging markets' willingness to save and lend.

David Bailey, 45 years old, who lives in Boise, Idaho, with his wife and three young children, is like many who enjoyed several prosperous years as a small-business owner until the housing market -- and then the broader economy -- collapsed, leaving him saddled with debt but no income. His company, Bailey Engineering, which turns raw land into subdivision plots, hasn't generated any income in months. He has cut his staff of 16 to a handful. Faced with a massive loss in his real-estate investments, he has sold a vacation home he built himself a decade ago and is selling another property to its current renters. He has sold his SUV to eliminate its $800 monthly payment and replaced it with a used minivan he bought with cash.

"I just want to get totally debt-free," he said. "I've completely changed in that regard. At this point I just want to make enough money to enjoy myself and my family -- I'm not trying to get rich anymore," he said.

A U.S. Spending Monitor survey by Discover, the credit-card company, to be released Wednesday, suggests Mr. Bailey isn't alone. About 35% of consumers surveyed in March said they expect to reduce their debt levels over the next six months, and a third said they have already done so -- even though their outlook on the economy has improved. One in three said they would put the money freed up by lower loan payments into savings. After doubling their outstanding debt between 2000 and 2007 to $13.8 trillion, U.S. households last year reduced their total debt outstanding for the first time since World War II, according to the Federal Reserve.

But will it last? A survey by AlixPartners, a business-advisory firm, found Americans plan to save 14% of their total earnings once the recession ends. Fred Crawford, the group's chief executive, said even if that number is "inflated by the emotions of the day," companies must "understand and plan for what could be a 'new normal.' " Two-thirds of those surveyed said they plan to buy less in the future, while more than half plan to buy less-expensive things.

Surveys can be lousy predictors, of course. "If you ask people how much they're going to save next month or next year you always get optimistic answers," said Ravi Dhar, director of Yale's Center for Customer Insights. "The same way smokers always say 'next year I'm going to stop.'"

But the severity of this downturn, the nearly $13 trillion loss of wealth since the recession began and the shaken confidence in the capitalist system is prompting a more powerful move toward frugality than usual. "It's the contagion effect," Mr. Dhar says, the same reaction that makes people travel less after a plane crash, or those who lived through the Great Depression conserve tin foil for decades. "The longer this lasts, the more it will have an impact on people's long-term behavior," he said. On top of that, getting credit is likely to be tougher for some consumers in the next decade than it was during the subprime-lending boom of just a few years ago.

Adding to the pressure on Americans to save more in the future is the shrinking size of their retirement nest eggs -- and the realization that they can't count on constantly climbing home prices and an ever-rising stock market to finance their retirement. Americans lost a fifth of the value of their 401(k) retirement accounts -- some $603 billion -- last year, according to the Employee Benefit Research Institute in Washington.

Some companies are already repositioning themselves for a more frugal consumer. "The current economic conditions have created a fundamental shift in shopping behavior," Kathryn Tesija, Target Corp.'s  executive vice president of merchandising, said in a recent conference call with investors. "We are allocating more shelf space to nondiscretionary categories" like food, health care and baby products, she said, and drawing attention to the store's low prices. "Guests won't come to us for everyday necessities if those necessities aren't priced right."

American consumers are traditionally resilient, and may yet return to their old ways. But the borrowing boom of the early 2000s ended badly, and the searing memories may shape consumer attitudes for years.