September 18, 2009
"We can't really go to the mall. If we go to the mall we do window-shopping," Jin Fan Harvilla, a typical middle-class woman in the United States, complained with dismay, saying that the financial crisis brought unprecedented fiscal challenges to families like hers.
Jin, who is from Beijing, China, has been settled down in Virginia for nearly a decade. She and her husband Tom Harvilla live in South Riding, a suburban community in Virginia 45 minutes west of Washington, DC.
In this well maintained, typical middle class neighborhood, there is a golf course, a community swimming pool, and a shopping plaza that caters to most daily household needs.
Jin and Tom live in a 4,500 square foot three-bedroom single house with their two young children and two dogs. When the couple goes to work, the children and the dogs are left to the care of Jin's mother.
In their neighbors' eyes, this is a perfectly happy family. However, the financial storm originated on Wall Street in New York shook the household to its foundations.
First, Jin lost her job as a financial analyst at Bearing Point Inc. when the large management and technology consulting firm filed for Chapter 11 bankruptcy in February, 2009. The news shocked Jin who never thought a company with over 3 billion U.S. dollars in revenue and more than 15,000 employees worldwide could fold up overnight.
"It's a global company, a big company. It should stand strong. But we didn't do very well in the crisis," said Jin, who is in her early 30s.
Jin was notified of her layoff by the company when she had just completed the maternity leave after the birth of her second child.
At a time when family spending had to increase with one more mouth to feed, the second blow hit the family: the value of their house plummeted during a recession.
The Harvillas bought their home at the peak of the residential real estate boom in 2005. One year after the financial crisis, not only the gain in home value over the last four years was wiped out, the value dropped so much that the couple would lose more money if they refinance.
"This housing price that we are in is probably the one that was hit the most," said Tom. "Because it's probably the most common price point...for a family, people in their 30s and 40s and have young kids."
According to realtors' advertisements, single-family house value in this community, which used to range from 500,000 to over 1 million dollars, dropped between 10 and 20 percent on average.
America's middle class saw a large portion of their wealth evaporated along with the stock market crash of 2008.
Gary Burtless, senior economist at Brookings Institute, said American households' wealth has collectively fallen about 12 trillion dollars in the last 18 months.
The sense of financial loss then became a "very big dread" on households spending which in turn hinders economic recovery, said Burtless.
"It will be an obstacle to recovery. There is no doubt about it," he said, noting that Americans were reluctant to spend.
"When savings rate rise by 5 percent, that represents about 3 percent weakening as a share of output for demand for products produced in the U.S. and products produced in the rest of the world," he added.
The sharp change in consumer behavior is clearly noticeable in the Harvilla household. Jin, who used to spend 600 dollars a month on new clothes and accessories, now tries to avoid going to shopping malls.
The couple began to budget their spending more carefully, using a spreadsheet to categorize their monthly expenses and putting most purchases on credit cards to better track where their money goes.
After paying home mortgage, bills for their three cars and other necessary goods and services, they make sure to contribute to the two children's college fund and put whatever is left in a bank account for emergencies.
According to a research by McKinsey Global Institute, for every percentage point increase in American households' savings rate, spending decreases by more than 100 billion dollars. The post-crisis reality is that export-leaning countries in the global trade system can no longer rely solely on American consumers to boost their economies.
Tough times enabled Tom to better appreciate Jin's more traditionally and conservatively Chinese style of spending and managing personal finance.
"She has been a tremendous positive influence that way," said Tom. "The mentality is very different that she brings than what I have that's more typical here, which is yes, overload with debt."