By Annys Shin and Nancy Trejos
Washington Post Staff Writers
Tuesday, January 13, 2009

In ordinary times, Bill Rattner would be better off than most. He's paid off his mortgage and has no credit card debt. He and his wife, a social worker, have been faithfully socking away money in their 401(k) accounts.

The 50-year-old Richmond resident, however, is also the creative director for the e-commerce group at Circuit City, which recently filed for Chapter 11 bankruptcy protection. He knows he could soon end up joining the 11.1 million Americans who are out of work.

So Rattner, with three children -- two of them in college -- has started acting like a man making up for years of financial profligacy. He and his wife have cut their expenses by 15 percent. They've trimmed $70 to $80 from their monthly grocery budget. They switched car insurance companies to get a lower rate. They are staying home for dinner more often and are buying fewer clothes. Whatever they save, they stash in a high-yield money-market account.

"Everything gets considered. Is this a need? Is this a want?" Rattner said.

There's evidence to suggest that more consumers are hunkering down. After hovering near zero for much of the decade, savings as a portion of disposable income rose from 2.4 percent in October to 2.8 percent in November, according to the Bureau of Labor Statistics. Also in November, auto loans, credit cards and other forms of consumer borrowing fell by $7.9 billion, the largest dollar amount since recordkeeping began, more than 50 years ago.

From the vantage point of Stephen Bingham, a financial planner at Bingham Financial Advisory in Arlington, the belt-tightening is long overdue.

"More people are coming to me stating that they want to get their financial house in order because of what's going on with the economy," Bingham said. "In some circumstances, they have extensive debt, including large mortgages, many over $500,000, some over $1,000,000, with very high monthly payments; college debt; and, for many, extensive credit card debt -- and conversely very little in emergency cash reserves."

Ironically, even if consumers are saving more, they could be helping to make the recession worse. The more people save, the less they spend, driving down demand for goods and services, which in turn dampens economic growth. The economist John Maynard Keynes dubbed this "the paradox of thrift."

But some economists question whether most Americans really are saving more.

Charles Biderman, founder and chief executive of TrimTabs Investment Research, an independent firm based in Sausalito, Calif., disputes that people are showing their thrift. His firm's analysis of daily income tax withholdings from the Treasury Department indicates that income is lower than the BLS has estimated and that the savings rate is negative.

He said money flowing into all savings vehicles, plus all mutual funds -- long- and short-term -- has been sinking since April 2008, suggesting that consumers have been selling stock and other securities to pay bills.

Biderman's data support the impressions of consumer debt experts that the drop in spending reflects the economic stress households face. "Defaults are rising. An uptick in savings doesn't mean all of a sudden people are in great financial shape," said Robert Lawless, a bankruptcy expert who teaches law at the University of Illinois.

Silver Spring retirees Carol and John Warner are among those who have been forced to cut back. The couple, ages 80 and 83, live on a mix of savings, investment income and annuities. After their health insurance costs rose, they skipped their annual trip to an art colony in Wisconsin and regular visits with three of their four children, who live out of state.

To cut their grocery bill, they said, they've cut out bacon and rely on a bumper crop of tomatoes and beans from their vegetable garden to make more soups. On a recent trip to the grocery store, John Warner had a clerk separate a single leek so he wouldn't have to buy the entire bunch. The couple have also reduced some of their long-term health-care-coverage options.

"We really didn't have a savings strategy before," Carol Warner said. "We had a lot more of a social life. We did a lot more entertaining. . . . We don't do that much anymore."

With the savings rate expected to rise further, some forecasters are heralding a new economy in which Americans continue to hang on to more of their cash and consumer spending, which currently accounts for 70 percent of economic output, plays a smaller role in driving economic growth. That scenario is all the more likely as more baby boomers retire; soon-to-be-retirees tend to be the most aggressive savers.

But Massimo Guidolin, an economist at the Federal Reserve Bank of St. Louis, said there is not enough data to say whether there has been a shift in consumer behavior. The savings rate does not capture whether people are being forced to save because of credit constraints or other financial exigencies or if they are intentionally saving.

Rozanne Weissman, a District resident, falls into the latter category. She said she's not in danger of losing her job, with a local nonprofit that focuses on reducing energy use. She has no problems paying the mortgage on her West End condo, which she's owned since 1985. Until now, she's felt few if any direct consequences of the recession.

And yet she has stopped going to the movies unless she can get free tickets. She no longer buys clothes and is boycotting hair salons until the economy improves. Her normally short auburn hair is down to her shoulders. Doing so has allowed her to sock away an extra $200 a month.

"I think, like many people, I've looked at what I am doing. What can I cut? What should I cut?" she said. "What won't I cut as long as I'm working? Everyone has to make their own decisions."