Economists call it the "paradox of thrift." What's good for individuals - spending less, saving more - is bad for the economy when everyone does it.
On Friday, the government reported Americans' savings rate, as a percentage of after-tax incomes, rose to 2.9 percent in the last three months of 2008. That's up sharply from 1.2 percent in the third quarter and less than 1 percent a year ago.
On Monday, the Commerce Department reported consumer spending fell for a record sixth straight month in December, dropping 1 percent amid worries about surging layoffs. That was slightly worse than the 0.9 percent decline economists expected.
Like a teeter-totter, when the savings rate rises, spending falls. The latter accounts for about 70 percent of economic activity. When consumers refuse to spend, companies cut back, layoffs rise, people pinch pennies even more and the recession deepens.
The downward spiral has hammered the retail and manufacturing industries. For years, stores enjoyed boom times as shoppers splurged on TVs, fancy kitchen decor and clothes. Suddenly, frugality is in style.
Grace Case, 38, of Syracuse, N.Y., is a self-described recovering creditaholic. For 13 years, she charged it all - cars, clothes, repairs, vacations. She'd make only the minimum card payments to sustain her buying spree for her and her family, which includes her husband and two children.
But after being laid off 2½ years ago from her job as an accountant, she landed another accounting job that cut her salary from $60,000 to $40,000. It was impossible to meet minimum payments on her card balances.
Now, the Cases are on a strict budget. They take "staycations," grow their own vegetables, buy only used cars and pre-pay cell phones. Case hasn't used a credit card in two years. And she's saving more.
"It's really a liberating feeling," she said. "If you want something, you have to have the money for it."
Many economists think the savings rate will keep rising, perhaps as high as 6 percent or more.
So where's the money going? To savings accounts? To debt reduction?
No one knows for sure. But Robert Frank, Cornell University economist, says it doesn't much matter.
"For economic purposes, paying off debt and saving are the same," he said. "Incurring debt is negative savings; paying down debt is savings."
He sees a long-term behavioral shift. He calls the spending of the past decade or more unsustainable.
"The only way people were able to (spend heavily) was by harvesting cash out of their home equity, which was just an illusion," Frank said.
The ripple effect has been brutal. The economy shrank at a 3.8 percent annual rate in the final three months of 2008, the worst showing in 26 years. The biggest reason was that consumer spending fell for a second straight quarter, something that hasn't happened since the 1990-91 recession.
Analysts believe the hard times will persist in 2009 as consumers, squeezed by layoffs and tighter credit, delay purchases of cars and other big-ticket items.
Some experts say consumers have been so shaken by how fast their wealth has shrunk, so burned by credit card debt, that they might not resume their robust spending for years, if ever.
"People are not saving; they are building financial bomb shelters," said Mark Stevens, who runs a management consulting firm, MSCO, in Rye Brook, N.Y.
Matthew Conrad, a financial manager at Complete Wealth Management in Orange County, Calif., says he knows of people who drive a BMW or Mercedes and eat macaroni and cheese for dinner several nights a week. That suggests some are making an awkward shift from free-spending habits and are reluctant to give them up.
Today's consumers might even start to rival their penny-pinching, Depression-era grandparents.
"The generation that lived through the Great Depression was very conservative in their spending and aggressive in savings," said Scott Hoyt, senior director of consumer economics at Moody's Economy.com. "I think we're going to have a set of consumers who are moving in that direction because they don't have that much faith in their assets."