MIDYEAR REVIEW OF INVESTMENTS AND PERSONAL FINANCE : Finally, the Savings Decade? : Some experts say that recent changes in Americans’ spendthrift ways may be the start of a dramatic shift in priorities.

Let’s face it: You know you don’t save enough money. Few of us do. And many of us have been vowing for years to change that--to commit, finally, to spend less, save more and feel better about our financial futures.

Could that be what’s at the heart of the U.S. economy’s surprising weakness this year--and the coincident boom in stock and bond markets?

Some Wall Street veterans, perhaps hoping against hope that the nation is at last changing its infamously spendthrift ways, are postulating that the six-month slump in consumer spending is more than a blip.

Rather, the dwindled interest in new homes, cars, clothing and other consumables, some experts say, may--just may-- be signaling the start of a dramatic shift in priorities for the aging American population.

For the numerically dominant baby boom generation in particular, whose first members will turn 50 next year, some evidence suggests that a decade of warnings about an impoverished retirement may finally be having the desired effect.

“The Republican-controlled Congress is talking about balancing the budget, reducing spending and cutting back on government benefits,” says Greg Smith, chief investment strategist at Prudential Securities in New York. “It may just be dawning on many Americans that they should be saving more for their futures.”

If he’s right, the implications of relatively lackluster spending growth and a rising savings trend through the end of the decade would be far-reaching indeed. While consumer-dependent businesses might suffer, the benefits of such a sea change could include extraordinarily low inflation and interest rates and continuing bull markets in stocks and bonds.

If he’s wrong, the economy may benefit in the short run. But then the nightmare vision of millions of pauperized boomer retirees in the next century is almost certain to become a reality.

Of course, extrapolating a short-term spending slowdown into a generational turnabout in consumption and saving habits is a bigger leap than many analysts are willing to make just yet. The idea that the world’s best shoppers--that’s us--have suddenly gone ascetic is laughter-provoking for more than a few economists.

Wait a quarter or two, the skeptics say, and Americans will be back in the stores and the car showrooms. And if the Federal Reserve Board cuts interest rates--and Congress later cuts taxes--all the better for feeding consumptive habits again.

But some analysts, such as Prudential’s Smith, aren’t so sure. “My suspicion is that consumption spending has slowed not only because of the [1994] rise in interest rates and some near-term uncertainty,” he says, “but also because we’ve reached the point where the long-term demographics are starting to bite the economy.”

For whatever reason, Americans’ drive to consume has unquestionably downshifted this year. Real consumer spending on manufactured goods, for example, fell at a 1.4% annualized rate in the first quarter and then at a 3.1% annualized rate in April and May, according to economist Edward Yardeni of C.J. Lawrence/Deutsche Bank Securities in New York.

Home sales have mysteriously remained below last year’s levels despite much lower mortgage rates, although May finally saw a pickup in demand.

Some economists also say the intense focus on monthly statistics is masking the more important trend: that the rate of increase in consumer spending in general in the ‘90s is well below the pace of the ‘80s.

Between 1990 and 1994, Americans’ total personal consumption expenditures rose 9.3% in inflation-adjusted dollars, down from 12.5% in the 1985-89 period and 12.2% in 1980-84, government data shows.

People aren’t spending as much in part because wages aren’t growing as fast as they did in the ‘80s, experts say. And that also explains why, despite weaker spending, Americans have had a hard time saving more.

Until now, that is. If consumers aren’t wowing anyone at the cash register lately, the surprise is that they have been committing dollars to popular savings and investment vehicles at an impressive rate:

* Net new investment in stock mutual funds totaled $41 billion between January and May, up from $39.8 billion in the last five months of 1994.

The bull market’s resurgence has obviously helped keep investors tuned into stocks. But analysts who see a new era of savings unfolding point out that stock fund purchases continued at a healthy pace all through 1994--even as a surge in interest rates caused the first annual decline in key stock market indexes since 1990.

* Cash has been pouring into small-denomination certificates of deposit at banks and S&Ls; at the fastest pace of the decade. The total in such CDs has jumped $96 billion so far this year, to $918 billion. The 1995 gain is already more than twice the $39-billion full-year rise in 1994, and much more than the continuing decline in regular savings deposits.

* Assets of money market mutual funds available to small investors have risen $46 billion this year after a $49-billion jump in 1994, according to IBC/Donoghue Inc.

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Part of that two-year gain of $95 billion represents a transfer from bond mutual funds, as some investors sold those funds in the wake of rising interest rates last year. But bond funds’ total net outflow has been $50 billion since 1993, or just 6.4% of the funds’ assets before the selling began.

That means most investors in bond funds stayed put--even though 1994 was the worst year for bonds in this century. And it suggests that much of the growth in money market assets represents new savings, not asset juggling.

* Participation rates in voluntary 401(k) retirement plans are rising. A national survey by the accounting firm KPMG Peat Marwick showed that 65% of eligible employees are investing through 401(k) plans this year, up from 61% last year. Among rank-and-file workers, as opposed to executives, the rise in participation has been even more significant, from 56% last year to 63% now.

* The government’s published consumer savings rate has been advancing steadily this year. That rate, which calculates net consumer savings as a percentage of disposable personal income, has averaged 4.9% so far this year, up from full-year rates of 4.1% in both 1993 and ‘94, though still a far cry from the 8%-plus rates of the early ‘80s.

But that “official” savings rate exemplifies one of the major problems in trying to get a handle on Americans’ true propensity to save money: Economists can’t agree on the best way to measure savings, so they can’t agree on whether we’re actually saving more as a nation--or on how much is enough.

The official savings rate subtracts taxes and spending from the grand total of consumers’ income and calls whatever’s left “savings.”

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For nearly 20 years, Americans--especially the 76 million baby boomers born between 1946 and 1964--have been constantly harangued about their minuscule savings rate. Even at 4.9%, the official figure seems woefully low compared to savings rates in other countries--especially Japan’s estimated 14%-plus rate.

Yet the government’s measure of savings completely misses consumers’ contributions to 401(k)s, because those contributions generally are made before taxes. It’s hardly a minor omission: These plans are the single most popular vehicle for voluntary retirement savings, with assets now estimated at $525 billion, up from $155 billion in 1986, according to Access Research Inc.

The official savings rate also fails to take into account the equity Americans have in their homes, which for most people is their most important asset.

Still, many economists insist that by almost any definition, the United States has consumed too much and saved too little for too long--a trend whose monuments are the massive budget and trade deficits the country has racked up since the early 1980s. A deficit, after all, may be viewed as a loan (or, some would say, a theft) from future savings.

With the Republican takeover of Congress last fall, however, the political will in Washington to slash spending and balance the federal budget appears to have stiffened. If Uncle Sam can become fiscally prudent at the same time that Americans strive to save more, the combination could prove to be spectacularly bullish for financial markets, some analysts contend.

In particular, high real interest rates--the cost of borrowed money above inflation--could decline as more savers and investors chase after fewer bonds. And the stock market, of course, usually loves lower interest rates.

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“This period could very well turn out to be more like the ‘50s,” enthuses Paul Kasriel, chief financial economist at Northern Trust Co. in Chicago. In that decade, high savings financed an economic boom, while inflation and interest rates were low and the stock market soared.

Another believer is William H. Gross, managing director of Newport Beach-based investment giant Pacific Investment Management Co. His great fear a year ago--that deficit-ridden First World countries were competing too desperately for capital with Third World countries that represent future consumers--has been largely mitigated by the bloodless revolution in Washington, he says.

As Gross figures it, the industrialized world’s governments, companies and consumers all went on a borrowing binge beginning in the late 1970s--a binge that is in the process of reversal.

Companies were first to repair their balance sheets, he says, and now governments are following. Consumers will be next, Gross predicts, for a simple reason: The baby boomers are moving into middle age, and that is for many people the peak period for saving and investing.

Gross notes that the age group whose numbers will grow fastest this decade is made up of people between 50 and 59. And that is true not just in America, but throughout the developed world.

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At the same time, the number of individuals in the 20-to-29 age group--the big-spending decade for many people--is declining sharply in developed countries, even as that group mushrooms in the developing world, Gross says.

Thomas E. Swanstrom, former chief economist for Sears, Roebuck and now a private economist in Chicago, had projected five years ago that the U.S. savings rate would begin to rise in the mid-1990s as the population aged.

“I think we’re finally seeing it,” he says.

Swanstrom believes that 401(k) plans, now used by 18.5 million private-sector workers, as well as similar payroll savings plans for workers in the public sector, may be underestimated for their current and future importance to the savings rate and the financial well-being of many Americans.

“I think younger people are saving a lot more than had been true” before 401(k) plans exploded in number during the early 1980s, he says. Consequently, “I don’t think the boomer generation will be anywhere near as bad off in retirement as some people believe.”

Yet some economists argue that glowing projections of a new “savings era” in America are grossly exaggerated.

One huge obstacle to increased saving, experts point out, is the heavy debt consumers still carry. At the end of 1994, outstanding consumer debt as a percentage of annual disposable income was a record 91%, up from 75% in 1985 and 61% in 1975.

Indeed, in a Kemper Financial Services-sponsored retirement survey this spring, respondents who said they were failing to save enough money fingered debt payments as the main reason. Nearly 70% said the problem was their mortgage or rent payment; 44% blamed credit card debts.

Even for baby boomers who aren’t deeply in debt, the cost of supporting children can delay savings plans far into the future, experts note. Dependent parents also are a burden for many. And it doesn’t help that Americans’ wages on average continue to grow at a snail’s pace--the downside of a low-inflation, highly competitive global economy.

Edward F. McKelvey, financial economist at Goldman, Sachs & Co. in New York, published a study in 1991 that called the demographics-will-boost-savings idea “a cruel hoax.” Today, he says his original contention still holds--that “the magnitude of the demographics argument was bunk.”

Despite aging boomers’ potentially higher propensity to save, McKelvey says, every American household entering the 45-to-54 age group in the ‘90s would have to save virtually every penny earned to move the official national savings rate above 10%. The reason, he says: The dissaving by other age groups--those much younger and much older--is a major drag on the national savings trend.

But by far the biggest obstacle to a meaningful rise in savings, some retirement-planning professionals say, is that many or most Americans still won’t seriously sacrifice in the present to have more in the future.

“I think Americans say they feel more responsible for their own retirement, but they’re still acting as if it’s someone else’s problem,” says Kathryn Hopkins, a Fidelity Investments executive vice president who oversees the Boston mutual fund giant’s retirement savings programs.

For example, although 401(k) plan participation is rising, Hopkins says, “There’s still the issue of getting people to take full advantage of the plans” by saving the maximum percentage of salary allowed.

The KPMG Peat Marwick survey found that the average employee contributes 5% of salary to a 401(k) plan, and Access Research data puts the average account balance of 401(k) participants at $27,000 today.

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But most aging baby boomers can’t get far saving just 5%. Consider the case of someone earning $40,000 a year today, who expects a 3% raise each year for the next 20. If that person saves 5% of salary a year and earns 7% annually on that nest egg, the total after 20 years would be just $110,400--and even that would be worth less than it appears, after even minor inflation along the way.

The point, says Hopkins, is that even people who think they’re saving well “are really woefully behind, because they don’t realize what they’ll need” for a comfortable retirement, and probably didn’t start saving early enough.

The optimists, however, are willing to give Americans the benefit of the doubt, especially in the wake of the flood of money into CDs, stock funds and other investments this year, even as spending subsides.

Every trend has to begin somewhere, Swanstrom and other economists note. For aging Americans, this may be what a down payment on the future looks like.