As energy prices ease, anxiety doesn't

Wary consumers socking away cash

Tanya Taft of Wrentham says she is using the money she saves on energy to stretch her budget elsewhere. (Rose Lincoln for the Boston Globe)

Roger Fritz is part of the reason why plunging gas and heating oil prices aren't giving the economy a boost.

He used to spend about $70 each week filling up his Toyota Corolla, but with the sharp drop in gas prices it now costs the Brighton resident only about $30. But rather than spending the extra cash on eating out and going to concerts, he is saving it.

"All these job losses," said Fritz, 36, who works in the mutual fund industry. "It's a little frightening."

Economists estimate that at least $200 billion will be put back into consumers' pockets over the next year as energy costs have dropped in half. But Americans, worried about keeping their jobs and their homes, are uncharacteristically hoarding cash instead of spending it. Consumer spending accounts for more than two-thirds of US economic activity, and when people stop spending, the economy shrinks.

Since oil prices began sliding from their peak in July, retail sales have fallen 7 percent. In the third quarter this year, consumer spending fell for the first time since 1991, and economists expect it to drop again this quarter. That would be the first time since 1980 that consumer spending has fallen in two consecutive quarters, according to the Commerce Department.

The pullback is happening when Americans are typically spending more because of the holidays. This year, though, the shopping season is expected to be one of the worst in decades.

"The average customer out there is saying, 'If I don't have to do it - if I absolutely don't have to do it - I ain't buying it,' " said Ken Goldstein, an economist at The Conference Board, a New York nonprofit business group that tracks the economy. " ' That sofa? We'll fix it. That book bag? We'll fix it. That car that got totalled this morning? We'll fix it.' "

For years, financial planners and economists have chided Americans for not saving enough. The savings rate has fallen in recent years to a level considered dangerously low - under 2 percent of disposable income. But now many are working out imbalances in their finances after many years of too much borrowing and spending. The savings rate is at an estimated 3.7 percent and is expected to climb near 6 percent in 2009, the highest since 1992, according to IHS Global Insight, a Waltham forecasting firm.

Over the long term, saving is good for the economy because its adds to the amount of money that can be invested in businesses, homes, and other economic activity. But in the short term, Americans' newfound parsimony couldn't come at a worse time. The sinking US economy needs consumers to go on a shopping spree to pull it out of a recession.

"It certainly boosts the economy" when people spend, said Sara Johnson, managing director of Global Macroeconomics at Global Insight. But consumers have become unusually cautious and are moving away from indiscriminate spending.

Take Luis Alberto.

When gas prices surged over $4 a gallon earlier this year, Alberto calculated his expected expenses and put himself on a budget. Months later - despite average prices for gasoline at $1.68 and heating oil at $2.36 a gallon - Alberto, 35, said he and his two roommates in Boston have no plans to go on a spending spree.

"The disposable income that we technically have now because of the lower [energy] prices is getting saved because we know they're going to go back up," he said.

Still, economists say, the dropping prices are providing relief to some consumers who for the past year have been squeezed by higher costs on food, healthcare, and other necessities. Moody's Economy.com estimates that lower energy prices could give back about $1,700 a year per household.

"A lot of that money is not going to be spent," said Gus Faucher, director of macroeconomics at Moody's Economy.com. "We're going to see a different attitude toward debt. I think people are going to be less willing to borrow to finance their consumption."

Tanya Taft, for one, isn't socking away the windfall from lower energy costs, nor is she shopping till she drops. She is using the extra cash to stretch her budget.

"It's definitely not going into savings," says Taft, a registered nurse, who hunted for bargains during a recent shopping trip to Patriot Place in Foxborough. "It's going into other things - the gift-buying, other bills."

David Cook, who owns a small organic farm in Ware, said he and his wife are being especially cautious because of the recession. They don't consider the money they are saving on gas as discretionary income. When gas prices first started zooming up, the couple cut back on driving. That hasn't changed.

"I guess we're hanging onto what money we've got," Cook, 73, said. "The only way anybody's going to survive what is apparently coming is to keep their cash."

Erin Ailworth can be reached at eailworth@globe.com. Robert Gavin of the Globe staff also contributed to this article.