On "the paradox of thrift"

U.S. household debt, which has been growing steadily since the Federal Reserve began tracking it in 1952, declined for the first time in the third quarter of 2008. In the same quarter, U.S. consumer spending growth declined for the first time in 17 years.

That has resulted in a rise in the personal saving rate, which the government calculates as the difference between earnings and expenditures. In recent years, as Americans spent more than they earned, the personal saving rate dipped below zero. Economists now expect the rate to rebound to 3% to 5%, or even higher, in 2009, among the sharpest reversals since World War II. Goldman Sachs last week predicted the 2009 saving rate could be as high as 6% to 10%.

As savings increase, economists say, spending is likely to contract further. They expect gross domestic product to decline at an annualized rate of at least 5% in the fourth quarter, the biggest drop in a quarter-century.

"The idea that the American family will quickly spend us out of this recession is a fantasy. It won't happen," said Elizabeth Warren, a professor of law at Harvard University who last month was named chair of the Congressional oversight panel tasked with overseeing the distribution of the government's Troubled Asset Relief Program funds.

-- "Hard-hit Families Finally Start Saving, Aggravating Nation's Woes," WSJ, Jan 6, 09

(All emphasis mine.)

Amusingly -- or wincingly, depending on what kind of mood I'm in when I ponder this -- our spending slowdown began right as we bought our house and began dealing with the fixer-upper aspects of it. But what about you guys? If you've implemented a spending slowdown, when did you begin it? What prompted it?

Comments

[Molly]

I guess we didn't technically begin a spending slowdown. In 2005, we moved into higher paying jobs but kept our cost of living the same. We had been following the crazy people on the Internet who were warning of the coming bubble burst in housing and credit so we thought we needed to prepare. Close friends and family thought we were stupid and/or crazy "tin foil hat" people.

[verucaamish]

The move from DC to California definitely impacted our spending. With higher rent (even as our income increased), we just felt like we had to spend less. But really cost of living evened out because we weren't spending hundreds of dollars in air conditioning and heating. The other big spending clamp was my diabetes diagnosis. I really have to look at menus to see if they fit my eating guidelines. What's funny is the high end CA cuisine places are great for diabetics but the sticker shock means we don't eat out more than once a week (down from three to four times a week).

[Lisa Schmeiser]

verucaamish, your comment reminds me of two conversations I had with my friend Erin. The first was when she and I began overhauling our diets last summer, and as we were grocery shopping for her, she said, "It's expensive at first ..."

And then last week, there we were in the grocery store again, our dietary habits now firmly entrenched, and she said, "Our food costs have dropped way down."

So what I'm saying, I guess is that there's sort of a spending paradox when you're watching what you put in your mouth ... you're less likely to spend in some areas because you're spending up in others!

[Becky]

About a year ago, we got more serious about building up our savings, so just the act of putting money in savings first meant that our spending slightly decreased. Then, starting in September, I took time off from working to finish my thesis once and for all, and one salary doesn't go very far in Southern California. So our spending has gone way down.

I'm job-searching now -- what a fantastic time to be doing it -- but I don't expect our spending will go up again that much once I have a job again. We'll probably move in the next two years, our only car is ten years old and won't last forever, we might have kids, we'll probably have other stretches where one of us is unemployed, etc. All good reasons to increase the percentage we stick in the savings account.

(It's hard to measure spending, because after rent, we probably spend most of our money on travel, not on "stuff". We haven't gone on a big vacation in the past year, but our day-to-day living hasn't changed all that much.)

[Becky]

The first was when she and I began overhauling our diets last summer, and as we were grocery shopping for her, she said, "It's expensive at first ..."

And then last week, there we were in the grocery store again, our dietary habits now firmly entrenched, and she said, "Our food costs have dropped way down."

Lisa, how much of this is a function of overhauling the pantry? I remember when we first moved, our grocery bills seemed obscenely large, week in and week out. I couldn't figure out what was so much more expensive in CA than in MI. Then they suddenly dropped, and I realized that we had spent about four months building up the pantry. You normally don't notice a bag of flour here or a tin of olive oil there, but when every week you're getting thyme and peanut oil and saran wrap and black beans, it starts to add up.

[Lisa Schmeiser]

Lisa, how much of this is a function of overhauling the pantry?

Since this is my friend's pantry we're talking about, and not mine, I can only guess, but I'm going to say: A lot of it is a function of overhauling the pantry.

To use an example from my own life: Last summer, we cut out processed carbs for their whole-grain counterparts. Whole-grain bread without high-fructose corn syrup is pricey -- nearly $5 per loaf. So I bought about $30 worth of raw ingredients -- whole wheat flour, rye flour, etc. per this recipe (http://www.nytimes.com/2008/10/08/dining/082mrex.html), and have been making bread most weeks instead. Expensive to start, but ultimately less per loaf once the pantry's in place.

[Kerry]

"Expensive to start, but ultimately less per loaf once the pantry's in place."

Which is one of the problems people with less capital always have--it's hard to do things cheaper if they require a large outlay to realize the cost benefit. Aka, the KFC commercial that claims you can't make fried chicken for $14.

[Lisa Schmeiser]

Kerry -- you're right.

This is actually a peeve of mine re: many frugality and personal-finance blogs ... they always assume the people who need to save money are the ones who have enough money to:

a) stock up on stuff, and
b) have access to reliable transit that would make transporting vast quantities of stuff easy, and
c) live in a place where market competition makes stocking-up sale prices necessary, and
d) have a residence where there's enough space to store a stockpile.

What are the odds that someone who really needs to save money meets all four conditions?

[verucaamish]

Good point on the storage. When we lived in a three bedroom house with a basement in Maryland, we went to Costco monthly. Two bedroom apartment in Oakland with limited storage. Not a single trip to Costco since moving to the West Coast.

[Kerry]

And also

e) the background knowledge and skills or ability to obtain them in order to make those strategies workable. Failure is expensive, and learning something new sometimes has a high failure rate. Example-food storage--not just canning, but questions of is that pantry cool enough for 10 lbs of potatoes not to go bad in a month.

f) The social connections to either make communal strategies feasible (knowing people who'd want to try pooling and splitting orders, bartering, trading, etc.) or organize and motivate a group of strangers to do so. Internet is good, but we've all been there with the Freecycle flakes and Craigslist kooks.