Hong Kong

IT’S game over for the American consumer. Inflation-adjusted personal consumption expenditures are on track for rare back-to-back quarterly declines in the second half of 2008 at a 3.5 percent average annual rate. There are only four other instances since 1950 when real consumer demand has fallen for two quarters in a row. This is the first occasion when declines in both quarters will have exceeded 3 percent. The current consumption plunge is without precedent in the modern era.

The good news is that lines should be short for today’s “first shopping day” of the holiday season. The bad news is more daunting: rising unemployment, weakening incomes, falling home values, a declining stock market, record household debt and a horrific credit crunch. But there is a deeper, potentially positive, meaning to all this: Consumers are now abandoning the asset-dependent spending and saving strategies they embraced during the bubbles of the past dozen years and moving back to more prudent income-based lifestyles.

This is a painful but necessary adjustment. Since the mid-1990s, vigorous growth in American consumption has consistently outstripped subpar gains in household income. This led to a steady decline in personal saving. As a share of disposable income, the personal saving rate fell from 5.7 percent in early 1995 to nearly zero from 2005 to 2007.

In the days of frothy asset markets, American consumers had no compunction about squandering their savings and spending beyond their incomes. Appreciation of assets  equity portfolios and, especially, homes  was widely thought to be more than sufficient to make up the difference. But with most asset bubbles bursting, America’s 77 million baby boomers are suddenly facing a savings-short retirement.