Spending Less? You’re Helping Slow the Economy

Conserving her family’s cash as costs rise, Riverside resident Laureen Pittman is postponing vacations, home repairs and other big purchases. For necessities, she is increasingly relying on discount retailers, shopping at Costco instead of Ralphs and Marshalls instead of Nordstrom.

Belt-tightening by consumers like Pittman is a key reason the U.S. economy is slowing. Inflation-adjusted economic growth fell to a surprisingly sluggish 2.5% in the second quarter from 5.6% in the previous three months, largely because of slower consumer spending, the Commerce Department reported Friday.

The economy’s latest growth rate was below the expected 3%, which is average for an economic expansion. It triggered a rally in stock and bond markets as investors boosted their expectations that the Federal Reserve will soon halt its anti-inflation campaign to raise interest rates.

Consumers -- accustomed in recent years to spending more than they earn, saving little and tapping home equity to pay the bills -- have clearly been hit by $3-plus gasoline prices. Whether that and other worries prompt consumers to scale back even more will largely determine whether the economy can maintain a slower but steady “soft landing” or veer toward recession, economists say.

But today’s consumers -- whose spending accounts for two-thirds of growth -- are increasingly resilient, able to maintain their standard of living thanks to the global economy, experts say. Such globalization has a dual effect: Although cheap labor abroad suppresses wages, it also provides consumers with low-cost goods, keeping U.S. inflation down.

“Without that international globalization, the consumer would probably be hit with an even bigger squeeze between income and outcome,” said Ken Goldstein, an economist at the Conference Board, a New York business research organization.

Consumers also are protected by a more stable job market. Employers are trying to increase efficiency with more technology and fewer new hires than in past expansions, leading to fewer job cutbacks.

Any recession now is likely to be milder than those in the past, because many manufacturing jobs -- once the most volatile part of the economy -- have been outsourced, removing the possibility of massive layoffs that sparked severe recessions, said Edward Leamer, director of the UCLA Anderson Forecast.

“It’s possible consumers can weather financial storms better than before because they’re more able to deal with the ups and downs of the economy,” Leamer said.

These trends contribute to consumers “being able to adapt, and in that way minimizes the severity of a downturn,” said Rosalind Wells, chief economist with the National Retail Federation in Washington. The last two recessions -- in 1990-91 and 2001 -- were relatively mild by historical standards, Wells said.

Riverside resident Pittman illustrates how today’s consumers cope with tighter times.

During the last six months, the 42-year-old stay-at-home mother, whose husband works as a local prosecutor, has seen her budget shrink. The Pittmans postponed trips to Disneyland and the beach, the purchase of a new car and repairs to the bathroom and deck at their 25-year-old home. With her 15- and 6-year-old sons in school, little savings and rising costs, Laureen Pittman is considering returning to work as a paralegal.

But she isn’t cutting back on everyday needs, just changing where she shops. She’s gone from shopping for her family at full-price stores to deep discounters, where she hunts for bargain bluejeans and handbags.

“It’s mostly the bigger things we cut back on,” Pittman said. “But we can’t really cut back on necessities -- groceries and back to school.”

Thanks in part to consumers’ ability to cope, most analysts expect annualized economic growth to remain 2.5% to 3% for the rest of the year. As long as consumer spending continues to grow by more than 1% and the Fed keeps inflation under control, a recession is unlikely, said Jan Hatzius, an economist with Goldman Sachs.

The cooling housing market does present a risk, and may be undercutting overall consumer spending as fewer people count on rising home equity to finance trips to the mall. Consumer spending grew by only 2.5% in the second quarter, down from 4.8% in the first quarter, mostly reflecting declining purchases of big-ticket items such as autos, according to the Commerce Department report Friday.

“People were selling part of their house to finance dinner at Olive Garden,” said Dirk van Dijk, director of research at Chicago-based Zacks Investment Research. “You can play that game as long as the price of housing is going up. You take that away and it becomes a scary proposition.”

Rising inflation also is a risk. Consumer prices rose at an annual rate of 4% in the second quarter, compared with 2.7% in the previous three months, according to the Commerce Department report. Excluding food and energy, prices rose 2.9% compared with 2.1% in the first quarter, the highest “core” inflation reading since 1994.

Slower business spending also could pose a challenge. Growth in business investment surprisingly fell to only 2.7% in the second quarter from 13.7% in the first quarter, contributing to the overall economic slowdown, according to Friday’s report.

Yet consumers remain optimistic. The University of Michigan consumer sentiment index for July fell by just 0.2 point to 84.7, with improvements reported Friday in consumers’ opinion of their present and future situation. This week, the Conference Board reported increased consumer confidence, with its index climbing to 106.5 in July compared with 105.4 in June.

It helps to have access to cheap goods. As deep discounters expanded and diversified the price range of their products in recent years, both in urban and rural markets, they became an option for a larger slice of consumers, retail analysts say.

“We have Wal-Marts popping up in places we never saw before and Target creating a line that’s acceptable even to the fashionistas out there. And we’ve got the Internet that makes it possible to shop anywhere, anytime, with anybody’s money,” said Marshal Cohen, chief analyst at NPD Group in Port Washington, N.Y., and author of “Why Customers Do What They Do.”

Cohen said these new “economies of scale” allow consumers to keep buying what they want even though they’re earning less on average. Wages have failed to keep pace with inflation, although they are showing signs of rising, adding to inflation concerns. Employers’ wage and salary costs increased 0.9% in the second quarter, after rising 0.6% in the previous three months, according to a Labor Department report Friday.

“Even with less money in my pocket, I’m not going to change the way I’m living,” Cohen said.

The brunt of the economic slowdown will fall on low-income consumers, he said, the same people who struggle to buy gas. Wealthy shoppers are less vulnerable to sticker shock at the pump, and will still frequent Nordstrom, Williams-Sonoma, Coach and other up-market stores, Cohen said.

Shoppers who earn $75,000 or less are switching to retailers such as Target and sampling discounters such as Dollar General, analysts said. Low-income shoppers who occasionally shopped at Wal-Mart are downgrading to Dollar General, 99 Cents Only Stores, Save-A-Lot and other deep discounters.

Nancy Taylor, 31, regularly shops for toiletries and household supplies at the Dollar General store near her house in suburban Detroit. The Home Depot cashier and mother of four said she was watching the price of socks and underwear. At Wal-Mart a package of six pairs of white athletic socks costs $4 to $6. Once the socks reach $8, she will start to buy them at Dollar General.

She and her husband, a maintenance worker at an industrial shop, earn about $30,000 and have switched from Kroger grocery store to Save-A-Lot, where $130 buys two weeks’ worth of groceries.

“We could go and spend that alone on meat at Kroger,” she said.