Consumer Spending Cutbacks Hurting Economy

Americans are rapidly shifting from spendthrifts to savers, slowing the broader economy, as they remain wary in the face of rising layoffs.

Job seekers listen to potential employer Pam Smith with Core-Mark during a job fair in the Egyptian...

Job seekers listen to potential employer Pam Smith with Core-Mark during a job fair in the Egyptian Ballroom at the Fox Theater on Tuesday, March 3, 2009, in Atlanta. The event, sponsored by EmploymentGuide.com was a part of the "Putting Americans Back to Work" job fair series. The government says the number of new claims for jobless benefits and the total number of people receiving benefits dropped last week, though they remain at elevated levels. (AP Photo/Erik S. Lesser)

(AP)

New economic reports Thursday suggest this dynamic won't change anytime soon. Retail sales and orders for manufactured goods fell. And the number of people claiming jobless benefits remained near record highs. The government is expected to report Friday that the unemployment rate rose again in February, with employers cutting nearly 650,000 jobs.

Consumers' growing frugality has hammered automakers, among other industries. General Motors Corp.'s auditors on Thursday raised "substantial doubt" about the auto giant's ability to continue operations, and the company said it might have to seek bankruptcy protection, sending its shares below $2.

Bill Hampel, chief economist for the Credit Union National Association, said his group's members are reporting record increases in deposits. Government figures show the savings rate jumped to 5 percent in January from zero last spring. That's the highest rate since 1995 and a much faster shift than he had expected, Hampel said.

Consumer spending makes up about 70 percent of the economy. It topped out at 71 percent in 2005, Hampel said, but will likely drop by 2 to 3 percentage points over the next few years.

Increased savings can actually lower economic growth. Economists call it the "paradox of thrift": What's good for each of us individually — being thrifty, limiting our spending — can worsen a recession when everyone does it all at once.

"I wish I could say the rise in the savings rate is over," said Stuart Hoffman, chief economist at PNC Financial Services Group Inc., who thinks it will keep increasing until late this year.

Hoffman said about half the 6.2 percent drop in economic output last quarter, the worst showing in a quarter-century, was attributable to lower consumer spending.

The stock market plummeted on GM's announcement and the bad economic news. The Dow Jones industrial average dropped 281 points, or 4 percent, while broader indices fell at similar rates.