Recession tales: Saving vs. spending a tough battle


There's no doubt that the current downturn has changed people's spending habits.

Since the peak in housing wealth, homeowners lost more than $5 trillion in equity and 15 million homeowners own homes that are now underwater (worth less than they owe). Unemployment is hovering near 10% with no clear signs of falling.

Homeowners' previous piggy bank -- home equity -- is no longer available for spending. Even if people still hold a job, many are worried that their jobs are at risk and won't spend except for necessities.

People, afraid for their future also changed their savings habits. In the first quarter of 2008, before the recession took hold people saved about 1% of disposable income. By the second quarter of 2009 the savings rate soared to 5% of disposable income. But now that we appear to be near the end of the recession the savings rate dropped back to slightly above 3% in the third quarter of 2009, as people see the end of the recession in sight.

While economists now don't believe this recession will be as deep as the Great Depression, its depth and length will certainly change people's spending and savings habits for a long time to come.