(To see a package of stories, pictures and graphics from Reuters on U.S. consumer credit, double click http://www.reuters.com/news/globalcoverage/consumercredit)
By Emily Kaiser
WASHINGTON, Nov 18 (Reuters) - Americans who were banking on soaring home and stock prices to finance their retirement will have to go back to saving the old-fashioned way, ushering in a new era of frugality that may last for years.
For much of this decade, easy credit that helped inflate the housing bubble and boost financial markets meant households did not need to set aside as much for a rainy day. Spending accelerated while the savings rate declined to near zero.
The trend is reversing now that the financial upheaval has blown a $7 trillion hole in Americans' wealth. Households are curbing spending at the sharpest rate on record, and economists see only a tepid rebound beginning late next year.
"The golden age of spending for the American consumer has ended, and a new age of thrift likely has begun," said Richard Berner, U.S. economist with Morgan Stanley.
"This recession is more than a cyclical event; we think it will trigger a sea-change in consumer spending behavior as consumers now embark on a long period of rebuilding thrift."
As recently as the early 1980s, U.S. households were socking away about 10 cents out of every dollar to cover emergencies or save for retirement.
By 2005 the saving rate was below 1 percent, thanks largely to higher returns on investment in the stock market and real estate, and financial innovation that made borrowing easier.
Joseph Lupton, an economist at JPMorgan in New York, expects savings to climb by 4 percentage points by the end of 2009, from 0.2 percent at the start of 2008. That would represent the sharpest eight-quarter rise in 50 years.
It reached 1.3 percent in the third quarter.
CHASTITY LATER
Flush with investment wealth, consumers stepped up spending over this decade, even though wage growth remained tepid.
Imports soared, particularly from China, driving up both U.S. deficits and Chinese surpluses. From the start of the housing market boom in 2002 through 2007, imports from China rose by 157 percent to $321.4 billion.
Economists have long warned that these trends were unsustainable, and Americans would eventually need to curb consumption while China boosted its own domestic demand.
The credit crisis is doing precisely that, but at such breakneck speed that it is worsening an already grim economic outlook. The global economy simply cannot adjust fast enough to the sudden drop in U.S. demand.
U.S. retail sales have fallen for four consecutive months, culminating in October's record large 2.8 percent decline. China has announced a nearly $600 billion plan to boost internal growth. The global economy is bracing for recession.
"We need to accomplish an increase in the savings rate but not all at once," said Christopher Carroll, an economics professor at Johns Hopkins University who studied how the housing boom lifted consumer spending.
"I'm not the first person to call to mind St. Augustine under these circumstances: Lord, make me chaste but not quite yet," he added.
Carroll said households typically change spending behavior gradually when they sense big shifts in their wealth. This time the effect may be much quicker because consumers have been bombarded with alarming news stories comparing the current slump to the Great Depression of the 1930s.
At the same time, banks have grown wary of extending credit and global investors who eagerly bought securities tied to consumer debt have backed away, driving up borrowing costs.
Torsten Slok, an economist with Deutsche Bank in New York, said until investor appetite for U.S. consumer debt returns to normal, spending will be subdued.
"If no one wants to lend to the U.S. consumer anymore, then the U.S. consumer cannot continue to buy at the current rate and will have to slow (spending) dramatically," he said. "The willingness in financial markets to lend to consumers will determine how high the savings rate has to go."
HOW MUCH IS TOO MUCH?
Erik Hurst, an economics professor at the University of Chicago's Graduate School of Business, said savings dwindled not because of rampant overconsumption but because households were generating much better returns through real estate or stocks. Now they are adjusting accordingly.
"As uncertainty goes up or the returns go down, both contribute to a rise in the savings rate," he said.
For the economy, the rate of savings itself doesn't matter as much as what is happening to consumption, which accounts for two-thirds of U.S. economic activity.
If history is any guide, next year's spending decline may be severe.
During the 1980 recession, which was the last time that the savings rate rose sharply, consumers cut back so dramatically that the percentage of income spent on personal goods and services dropped to just under 74 percent at the end of 1981 from nearly 77 percent in the first quarter of 1980.
In the latest quarter, consumers spent a little over 83
percent of their income. If that were to fall to 80 percent, it
would mean a $300 billion reduction in spending, equal to the
annual U.S. sales of retailing behemoth Wal-Mart