Wednesday, April 15, 2009

Economic Decline Impacts Spending Habits

by John Kerkhoff

Traditionally, Americans are big spenders. In fact, they spend more than other citizens of the western industrialized countries. Economists say the U.S. economy will suffer if Americans reduce their spending. Even the government is getting in on the spending spree.

Young adults have mixed feeling about saving or spending their tax refunds.

The economic downturn has caused some changes in consumer behavior. The data for refunds this year show that Americans are spending less and saving, investing and paying down debt more. Indeed, the data are clear: Americans are becoming frugal.

Ohio University economics professor, Richard Vedder, says that during tough economic times, people's propensity to save increases while spending decreases. He says that during strong economic times, Americans typically spend 95-99 cents on the dollar. Now, however, people are saving 30-40 cents per dollar.

Richard Vedder talks about American savings

A 2006 AP story explains just how much Americans like to spend money. They like it so much that, in 2005, the savings rate for Americans was -0.5 percent. That's right, on average, people spent more money than they made. They spent their income, their tax refunds and then borrowed to spend more.

Those days are over, at least for now. An AP-Gfk poll shows that more than half of the people receving refund checks will use the money to pay off bills. This number is up 20 percent from last year. Additionally, more than 35 percent is planning to save or invest the money and another 37 percent is going to pay down debt. Only 38 percent of people surveyed said they will spend their refund checks.

Vedder says that college students behave very similar to older Americans. He says both students and seniors tend to spend more. He notes, however, that even college students will probably begin to spend less this year.

Vedder explains how consumer behavior has changed

Total tax refund requests are up 15 percent this year. Even with people spending less of their refund checks, economists say there will be a boost in retail sales. That boost, however, will last only for the short run, they add.

College students are one group that is contributing to the rise in refund requests. Many college students are filing for the first time. Here are some tips for students who are new to the tax game. These tips are aimed at helping college students get the most out of their tax returns.

Whether Americans are spending, saving, investing or paying off debt, there seems to be no debate that tax refunds are providing at least some temporary relief.

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