A shift in home economics

American households are adjusting to a new economic climate. Their propensity to spend has been tempered by stronger impulses to save and manage debts in a time of uncertainty.

This trend could help shape the trajectory of the recession, affecting the strength of the recovery.

Here's a quick reality check on the financial health of US families.

What's happened to

household income?

With unemployment rising from 4.5 percent to 8.9 percent, many working families have taken a big hit to their income. Retirees have had to face declines in stock-market assets and also – as the Federal Reserve has cut interest rates – on fixed-income earnings such as certificates of deposit.

Still, pay raises continue for millions of workers, so that the total US disposable income hasn't fluctuated much.

What about net worth?

Family wealth has taken a much larger hit than in most previous recessions because of the simultaneous declines in the stock market and housing values. This has hit families in an uneven way, since many don't own homes and most don't own much stock. But by the end of last year, most families had a lower net worth than in 2004, economists at the Federal Reserve estimate. Overall, a decade of gains in net worth have been erased.

The typical family still has a positive net worth, with assets (financial plus home equity) larger than liabilities (such as mortgage and credit-card debts). But millions of households, including those that took loans to buy a home or withdrew home equity in recent years, have a negative net worth. Personal bankruptcy filings rose above 1 million in the past year, double the rate in 2006.

Have America's spending habits changed?

Automobile sales have plunged 40 percent in the past year. Sales of other durable goods, from furniture to electronics, are also way down. About one-third of Americans have decided to cancel a vacation or other trip this year.

But in general, most spending continues as usual during recessions, even one this severe. Overall consumer spending has fallen about 2 percent from its peak last year and now may be stabilizing.

How deep is household debt?

As of 2007, the Fed found that 77 percent of households had debt, with a median amount of $67,000. That includes 46 percent of families who have mortgages, an equal number who have credit-card balances, and 35 percent who have car loans.

Of course, lots of families have several types of debt all at once. A median mortgage ($110,000), credit-card balance ($3,000), and car loan ($14,600) add up to nearly $128,000 in debt – 2.7 times the median annual income for a household.

Is that too much? Most families don't have a crushing debt burden, but it's a lot worse than it was. And nearly 15 percent of households in 2007 were deep in the debt danger zone – owing 40 percent or more of their annual income for debt service.

What about savings and retirement?

People who've been saving in a 401(k) for 10 years or more have seen account balances fall by more than 10 percent, on average, since the start of last year, according to the Employee Benefit Research Institute. Only 13 percent of workers and 20 percent of retirees are confident about having a financially secure retirement, according to an institute survey.

That, coupled with concerns about possible job losses in the recession, is pushing the personal savings rate back up from historic lows – 4 percent of disposable income this year, versus a level near zero in the first quarter of 2008.

Are people easing their debt burdens?

Tighter terms by credit-card companies is one reason revolving debt (made up mainly of card balances) is down, falling at a 6.5 percent annual rate in the first quarter of this year.

Meanwhile, many families are taking advantage of low interest rates and new government programs to refinance home mortgages and reduce monthly payments. But the decline in home values means that the negative-equity position of many borrowers is too deep to allow them to qualify for a mortgage modification.

Can consumers spend enough for the economy to start growing again?

Jan Hatzius, an economist at Goldman Sachs, sees consumer spending shifting from contraction back to growth as credit conditions stabilize.

But he predicts that spending will stay sluggish as households try to bring their savings rates back to historic norms of 6 to 10 percent of disposable income.

Many forecasters say that what lies ahead is a slow rebuilding process for consumers and the economy.

"This is a huge challenge," says John Silvia, chief economist at Wachovia Corp. in Charlotte, N.C. "We don't want to get back where we were before," with growth tied to record levels of household debt. But "we want the consumer to feel good again."