In a classic case of “Be-careful-what-you-wish-for,” U.S. consumers are finally doing what financial experts have been nagging us to do for decades: spending less and saving more.

Americans’ “Personal Savings Rate” began the 1990’s at around 7%.  Then in 1992 it began to drop.  It hit 2.4% in 1999 and remained at that level (on an annualized basis) through 2004.  

In 2005 another milestone was reached: the savings rate fell below 1%.  For the year it came in at less than 4-tenths of one percent.  There was a slight pick-up in 2006 and 2007, but the savings rate still remained well below 1%. 

As 2008 began, the savings rate continued to slide.  It actually hit zero in April of that year.

Then, seemingly out of nowhere, the personal savings rate suddenly jumped to 4.8% in May.  While it did not reach this high a level again for the remainder of the year, the average savings rate from June through December was solidly above 2%.  

This trend has not only continued, it has increased this year.  In fact, for the first three months of 2009, Americans should be feeling downright virtuous about our newly-acquired taste for thrift: we’re saving at the rate of 4.2%.

So, what’s the problem?  

It’s The Economy, Stupid

At just under 70% of U.S. gross domestic product, consumer spending is the main engine that keeps our economy chugging along.  (Not to mention the fact that American consumers are also a major driver of the global economy.)  With more and more of us thinking twice about opening our wallets or whipping out plastic, all sorts of businesses- from retailers to car dealers (enough said) to restaurants and the travel industry are experiencing a decline in sales.  

In other words, the decline in consumer spending is crimping the economic recovery.  

A survey conducted in February for Securian Financial Group found that, thanks to the recession and the decline in the financial markets, Americans are more focused on reducing their debt than spending. The number one financial goal of pre-retirees and second-highest goal of those already retired is to “pay off loans, overdue bills, and other debts.”  Ranking third for both groups is to “save money for emergencies.” 

Though not exactly a surprise, the main conclusion of "Debt: The Detour on America’s Road to Retirement" is that personal debt is the main reason we’re not saving as much for retirement as we should.  According to Securian marketing director Kerry Geurkink, “When people have a significant amount of debt beyond mortgage debt, their priorities shift.” 

What’s new is the dollar amount. Excluding the balance owed on a mortgage, $25,000 seems to be the so-called tipping point.  That’s when someone’s focus tends to switch from saving for retirement to paying off loans, credit cards, and other I.O.U’s.

The survey also found that, compared to two years ago, pre-retirees are slightly less likely to use debt to finance a major purchase such as a new home, car, furniture, or vacation.  Instead, individuals say they intend to save up the money needed.  “The old-fashioned value of saving before you buy is going to have to be learned by a whole new generation,” predicts Geurkink.

Our new-found frugality has its limits, however.  Perhaps because we consider them “necessities,” across all age groups, a significant number of us would justify taking on debt to pay for the following:  

• New television (47%)
• Home Internet service (46%)
• Home computer (44%)
• Cell phone (40%)
• Cable/satellite TV service (35%)

(Bad news for dead-beat relatives: Americans of all ages are less likely to extend financial help to a family member.)

Still, despite our best intentions, American consumers haven’t really made a dent in paying down our debt.  Nearly half of us (47%) are making monthly payments on a car loan and the same percentage have credit card bills that we do not pay off each month. 

Hugh Johnson, chief investment officer at Johnson Illington Advisors, a wealth management firm in Albany, N.Y., says it’s going to take time.  In Johnson’s view, consumers “went on a borrowing binge from 2000 to 2006,” accumulating debt to “excessive levels” and have just begun the process of “de-leveraging their balance sheets and reducing debt.”  

According to Johnson, in the last three months of 2008 Federal Reserve Bank data shows consumer debt was reduced by $300 billion, “the first time since 1952 that consumer debt actually went down in a quarter.”  That was accomplished through a combination of spending less and paying down existing debt. But, he says, a significant amount of debt reduction has been involuntary-- the result of lenders foreclosing on delinquent mortgages.  

Those of us not facing the extreme debt problem of foreclosure are none-the-less struggling to reduce  the amounts we’ve borrowed.  As Johnson calculates it, “We’re a long way from where we should be.  It’ll take at least 10 quarters before consumer debt is at levels that are manageable.  Maybe through the second quarter of 2012.”

As long as American consumers are reluctant to spend and, instead, are committed to saving more and reducing their debt, both the domestic and global economies will struggle. “It’s hard to make the case that we’re going to have a normal recovery,” says Johnson.

If you have a question for Gail Buckner and the Your $ Matters column, send them to: yourmoneymatters@gmail.com, along with your name and phone number.