Consumers have pretty much taken it on the chin for the past year or so. Plummeting home prices as well as hard-hit retirement accounts and stock portfolios have decimated household wealth. During the third quarter of 2008 alone, the net worth of U.S. households contracted $2.8 trillion (yes, trillion) or nearly 5 percent, according to Federal Reserve data. In a sign of how sharp the real estate market's downturn has become, owner's equity as a share of household real estate holdings dropped to 44.7 percent, the lowest figure ever recorded. The worst has yet to reveal itself as these data only go through to the third quarter; since conditions really started to snowball in September and October, the next snapshot will only show further withering of household wealth.
In light of these circumstances, and a deteriorating labor market raising workers' fears of becoming unemployed, consumers have taken the most logical (subscription required) approach-that is, to curtail spending, increase saving, and pay down debts. According to this opinion piece by economist Hal Varian (famous guy, used his textbook in college), many of the proposals being bandied about in Washington at the moment to stimulate consumer demand likely will result in money flowing to consumers' savings accounts rather than cash register tills. Not that this is a bad thing, necessarily, since savings are used to raise the pool of funds available for investment and a source of stability for bank balance sheets. Plus, the low savings rate of the past several years was a symptom of consumers relying too much on debt (MEW, etc.) to finance spending.