Buckle your seatbelts for a bumpy ride through recession

March 8th, 2009 - 10:54 am ICT by IANS  

By Nico Pointer
Washington, March 8 (DPA) Courtney Austermehle always spent her money on what she calls “girlie stuff”. The 23-year-old went to high-end hair salons, paid expert manicurists to do her nails and bought expensive clothes. But the Philadelphia woman has not been on a shopping spree for a long time.

“I don’t shop anymore,” she said soberly. Instead she has started cooking at home more often and takes the subway instead of her car.

Like Austermehle, more and more Americans are tightening their belts as the country becomes embroiled in the worst economic crisis for decades. Since the recession began in December 2007, the world’s largest economy has shed more than three million jobs, countless companies have gone bankrupt, the stock markets have plunged and many properties are in negative equity.

Those lucky enough to still have a job have slashed their expenditure and are bracing themselves for an uncertain future. After decades of uninhibited spending, great disenchantment has set in.

“The consumers are traumatised,” said Mark Stevens, head of the consultancy MSCO in Rye Brook, New York and author of the book “Rich is Religion”, which shines a light on the results of frenzied consumerism in the US.

“People save money, because they are afraid to lose their jobs,” said Stevens.

But the new miserliness could plunge the stricken economy ever deeper into crisis, experts warn as about 70 percent of US business activity relies on private consumption.

Many people in the US are staying away from restaurants, skipping vacations and holding off on buying new cars. The notoriety of Americans as consumers who live beyond their means is legendary, as is their disposition to fall headlong into debt. In the past few years, the US savings rate or the amount of available income put aside as savings has been consistently under 1 percent. It even slipped into negative territory in 2005.

“Our spending addiction caused the whole crisis,” Stevens said. Ordinary Americans, however, are changing their ways.

Annie Moncada, 63, admits to having bought frivolous items. Now she’s living more modestly and tries to spend less money by leaving her credit cards in her wallet. She’s cooking hamburger instead of steak and is more conscientious about saving electricity.

The overall result is a drop in consumer spending, which fell in December for the sixth consecutive month, said the US Commerce Department. The savings rate rose to 2.9 percent in late 2008.

“That’s the biggest change in the trend in the last 20 years,” said Greg McBride, financial analyst at the Internet portal bankrate.com.

Economists cannot really fault the development. As savings accounts are built up, new capital is made available for future investment and it lowers the debt burden of the US overseas.

“It is good in the long term, because we cannot live on debts,” said Nigel Gault, head US economist at IHS Global Insight, a financial consultancy.

But US consumers have decided to save their money at an inconvenient time. What may be good for individuals could have a terrible effect on the US economy as a whole as it is under threat of a vicious cycle in which Americans become stingy and robbing their already shaken economy of any strength in the process and exacerbating the recession.

“In the short-term, this is painful for our economy,” said McBride. And the stinginess affects not only the US economy, but export-oriented economies like China, which depend on the US consumer, said Gault.

The hopes of economic experts now rest in the multibillion-dollar US economic stimulus package.

“It is now up to the government to build consumer confidence,” said Gault. President Barack Obama hopes the package’s tax cuts and spending worth $787 billion will restart US consumption. But many economists are sceptical and believe the programme is too small in light of the dramatic decline.

Despite all the billions spent, many experts also predict that US consumption will be more modest in future, at least in the short term. Economists predict the savings rate will increase to 6 percent this year. But Stevens, whose book is meant to teach Americans a bit of modesty, doubts that his countrymen will hold onto their money for long.

“We always need a bigger house and a faster car than our neighbours. Unfortunately, it is the American way.”

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