Monday, Oct 20, 2008
The U.S. may be on its way to becoming a nation of savers, whether Americans like it or not.
With home and stock prices declining and credit hard to come by, consumers who have fallen out of the savings habit are being forced to curb borrowing and rein in spending.
That is bad news for companies catering to them, which will have to retrench as well. Detroit automakers may need to slash costs and merge as Americans hold onto their cars longer. Shopping malls might be forced to shut as retail traffic trails off. Hotels may have to shelve expansion plans as vacationers become stingier with their dollars.
The big concern is that households, spooked by the turmoil in financial markets, will cut back rapidly and sharply, plunging companies into bankruptcy and deepening a recession that many economists say has already begun.
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“If we did have a quick cut in spending, it could turn a pretty nasty recession into possibly the worst downturn we’ve seen in the postwar period,” says Michael Feroli, a former Federal Reserve official now at JPMorgan Chase & Co. in New York. Even without a collapse of consumer spending, Feroli expects the economy to contract by 2 percent in both this quarter and the next.
There are signs that consumer spending is already giving way. U.S. retail sales fell in September for the third straight month, the longest slump since the government began keeping records in 1992. And consumer confidence as measured by the Reuters/University of Michigan index fell by the most on record this month. Fed Chairman Ben S. Bernanke will give the central bank’s latest assessment of the risks to the economy when he testifies before the House Budget Committee today.
`A Quantum Downward Shift’
“We are going through a quantum downward shift in consumer spending,” says Allen Sinai, chief economist at Decision Economics in New York. “Any industry that is tied to the consumer will have to downsize and consolidate.”
This article was posted: Monday, October 20, 2008 at 12:03 pm