For a generation, Americans snapped up clothes tailored to every demographic, bought the latest sport utility vehicles and piled on the wide-screen TVs.
No more. The nation’s long buying binge appears to be over. And that’s probably bad news for the economy.
Today, when the government issues its first snapshot of growth in 2008, the role played by U.S. consumers will appear smaller and faded compared with the past, when, year after year, their spending became ever more important to the economy.
“We’re at a watershed moment,” said Jay P. Feldman, an economist with Credit Suisse in New York. “The era of consumers living beyond their incomes is at an end.”
Most economists expect the gross domestic product for the first three months of the year to show that consumption inched upward a few tenths of a point, enough to keep the economy above the zero mark -- though barely. That pales next to the 2.5% and 3% leaps of recent years, and much of the rise will be the result of Americans’ paying more, especially for food and gas, not buying more.
“This is going to usher in a period when consumption is going to be as weak as we’ve seen it in two decades,” predicted Edward F. McKelvey, senior economist with Goldman, Sachs & Co. in New York.
The abrupt slowdown in consumer spending has already wreaked havoc with retailers, especially auto dealerships, furniture showrooms and apparel stores.
Auto sales fell 12% last month compared with a year earlier, according to AutoData Corp., which compiles industry statistics. More than 2,100 retail stores have been shuttered since January and more than 6,500 are likely to be by the end of the year, according to the International Council of Shopping Centers.
A string of mid-size chains, including furniture sellers Levitz, Bombay and Domain, catalog retailer Lillian Vernon and electronics firm Sharper Image, have gone bust. And home goods giant Linens ‘n Things is tottering on the edge, having missed making recent interest payments.
Construction of retail space, which ratcheted up from about 200 million square feet a year in the 1970s and 1980s to more than 300 million square feet in each of the last three years, is expected to plunge nearly 20% this year, according to Robert Murray, economics vice president with McGraw-Hill Construction in suburban Boston.
“The stores that are doing well are the Wal-Marts and Costcos that sell you things you have to have. The stores that aren’t doing well are the Targets, the Dillard’s, the Kohl’s that sell you things you don’t have to have,” said Howard Davidowitz, a veteran retail analyst in New York.
“People have a mental balance sheet and know where they stand,” he said. “It makes them scared, and when they’re scared, they don’t buy.”
The big question -- for retailers and, more important, for the nation as a whole -- is whether consumers will keep doing this or set off on a new shopping spree the moment economic conditions improve.
At any other time during the last 25-plus years, the odds would seem to favor a new spree. Americans have repeatedly defied predictions that they had reached the limits of their resources and have ascended to new heights of spending.
Between 1980 and the end of last year, for example, average weekly wages of production and nonsupervisory workers, who make up 80% of the nation’s labor force, remained essentially flat. The trend convinced many analysts that consumers didn’t have the wherewithal to expand their purchases of goods and services.
But, as it turned out, Americans boosted their after-inflation spending by nearly half. In the process, they pushed up the fraction of the nation’s total annual output that goes to consumption from 63% to more than 70%, or by more than $1 trillion by today’s measure, according to government statistics.
Consumers managed this feat by doing three things -- reducing their savings, taking on debt and relying first on rising stock prices and then on increased housing values to keep them financially whole. And for most of the last 2 1/2 decades, that strategy worked.
Now, however, people appear to have played out two of the three tactics -- running down savings and going into debt. Personal savings have dropped from roughly 10% of after-tax income to zero, according to the federal government’s Bureau of Economic Analysis. And the broadest measure of Americans’ debt burden has risen from a little over 15% to almost 20% of income, according to the Federal Reserve.
That leaves consumers with just one of their original tactics: relying on stock and housing prices to swing back up.
Although the broad stock market briefly topped its previous March 2000 peak, it has since sunk again. And there are new signs that a recovery of home prices is still far away.
The widely used Standard & Poor’s/Case-Shiller index of housing prices in 20 metropolitan areas posted another sharp decline in February, dropping 12.7% from a year earlier. The decline occurred in 19 of the 20 areas, showing that the losses are widespread. And the drops have grown consistently larger with each passing month, suggesting that the pace of losses is picking up rather than leveling off.
The question is whether all the bad news has profoundly shaken consumer confidence.
“What’s really going to count is whether or not people decide they still can rely on the stock and the real estate markets,” said McKelvey, the Goldman Sachs economist. “Do they decide the housing slump is a hiccup -- a breathtakingly large hiccup, but a hiccup?”
Or, he said, will their confidence that home and stock prices will resume their upward trend be so shaken they can no longer depend on them as sources of wealth?
Recent events aren’t making it easy for consumers to recover this crucial confidence for two reasons. First, the home and stock prices that they want to see recover keep falling, while the food and fuel prices that they want to see fall keep rising.
Second, and just as important, prices for both sets of things take huge leaps and plunges almost daily.
“It’s not price increases so much as price volatility that discourages people from consuming,” said Michael P. Niemira, chief economist with the shopping center council.
“They equate it with uncertainty, and consumers hate uncertainty.”
If Americans ultimately decide that their longtime strategy of low savings, high debt and reliance on stocks and housing no longer works, the results could be big, and unpleasant. People would have to save more, rather than rely on price appreciation to cover spending. They’d have to consume less. Businesses, in turn, would have to find new consumers elsewhere, especially overseas.
“Nothing’s going to reverse a generation of behavior overnight,” said Feldman, the Credit Suisse economist. But “what the markets are signaling is we have to consume less and export more.” Doing so would make for a very different -- and considerably less heady -- America than that of the last quarter of a century.