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1940s frugality is back, says economist

Consumers are paying off credit excesses and putting money into savings, marine bankers are told

As the economy recovers, expect a new consumer to emerge - one who is value-conscious, savings-minded and wary of debt.

That was Gina Martin Adams' forecast of consumer attitudes at the National Marine Bankers Association's annual conference Nov. 10 in Hilton Head, S.C. The Wells Fargo Securities economist says these are American consumers not seen since the 1940s. "You will lose those consumers in 2010 and 2011 if you think they are the same consumers that you sold to from 2003 to 2007," she told the bankers.

Americans' loss of net worth in the financial crisis was double that of the 2000-01 recession. "We've never seen housing prices fall like they have [since 2007]," she says. In metro areas, they have dropped anywhere from 20 to more than 50 percent.

Meanwhile, consumers are trying to pay off the debt they amassed during the 2003-07 bubble. They are trimming $10 billion a year off credit card debt alone. Americans were spending 19 percent of their disposable income to service debt in 2008; they are spending about 18 percent now, and they need to get that down to 17 percent to stabilize their finances, she says. Adams says consumers are likely to remain focused on reducing debt rather than increasing it for a while.

Going forward, she says, their discretionary spending likely will be a third of what it was in 2007. She told conference attendees they can expect consumer spending to grow a wimpy 1 percent in 2010, 1.5 percent in 2011. And after 20 years of gross domestic product growing at an average of 3.3 percent, the nation likely will see 2 percent growth in 2010, 2.2 percent in 2011, she predicts.

Americans are becoming savers again, which, along with reducing debt, really isn't a bad thing, Adams says. Americans' saving rate was 12 percent of income in 1982. That had fallen to 1 percent in 2006. Today it's about 4 percent. She says that figure could go as high as 7 percent, as consumers try to recapture net worth.

U.S. consumer spending is driven by income, credit, wealth and sentiment [confidence], she says. Income, credit and wealth are all in significantly negative territory and consumer confidence has not recovered from record low levels.

With unemployment high and gasoline prices projected to rise, "The consumer is telling us they're not feeling great about their overall situation," Adams says. "The four legs of the table still are not where we want to see them."

Consumers are going to be thrifty in 2010. "They are going to spend more of their income on core items than on discretionary items," she says.

From 2008 to 2009, spending on discretionary items was down from 45 to 40 percent of income; expenditures on core items were up from 55 to 60 percent.

There's an upside, too. Although unemployment is at 10 percent and unemployment including underutilized workers is 17.2 percent, during the Great Depression, more than 25 percent of workers were unemployed. Eighty percent of workers are employed today and their incomes are going to go up about 1 percent next year.

"The consumer is showing some signs of life," Adams says. That's the good news. The caveat: "We've seen no real growth in sales yet."

This article originally appeared in the January 2010 issue.


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