While the Dow Jones industrial average and the unemployment rate get more attention, the shoppers outside a Wal-Mart in Northern Virginia offered a taste of what some economists believe is the more immediate reason that the U.S. economy may be on the verge of another recession.
Americans are still spooked.
A slump in consumer spending stirs fears of another recession.
Aug. 26 (Bloomberg) -- Brian Sozzi, an analyst at Wall Street Strategies Inc., talks about U.S. back-to-school retail sales and outlook. Sozzi speaks with Adam Johnson and Hitha Prabhakar on Bloomberg Television's "Street Smart." (Source: Bloomberg)
More than two years after the recession’s official end, people are driving their cars a year longer, holding back on jewelry and furniture, and swapping brand names for cheaper store brands at the supermarket.
More ominously, the once sturdy optimism of Americans appears to have crumbled, according to one key measure. Breaking from precedent, Americans no longer believe they will make more money next year than this year, according to the University of Michigan’s Surveys of Consumers. These expectations used to rebound after recessions; this time they didn’t.
This crisis of confidence, a departure from long-standing expectations of rising American prosperity, is spurring millions of small consumer decisions that collectively determine whether businesses should expand, and in turn whether the recovery will continue to falter.
“I don’t get the Kellogg’s cornflakes anymore,” Robert Sherman, owner of a heating and air-conditioning company, said last week outside a Wal-Mart near Alexandria. “I’m not taking vacations. Why? I’m scared.”
Shah Bahramy, a retired physician who dropped Macy’s in favor of Ross Dress for Less, said, “I’m trying to be as conservative as possible.”
Linda Bailey, an insurance agent, recently traded Heinz ketchup for a store brand and came to Wal-Mart last week, although she would have preferred a smaller store. “Fear is driving things,” she said. “We really don’t know what’s going to happen, do we?”
As recently as March, Federal Reserve Chairman Ben S. Bernanke, citing rising consumer spending and other factors, foresaw “a somewhat more rapid pace of economic recovery.”
Before his statement, consumer spending — which represents a significant portion of economic activity in the United States — had been on a steady rise from the depths of the recession.
But every month since then, reports on consumer spending have slumped — just a little each month, but the acceleration of the recovery was gone.
Jittery consumers
One of the key reasons appears to be that American consumers are nervous.
Since 1981, the University of Michigan’s Surveys of Consumers have asked people, “By about what percent do you expect your [family] income to increase during the next 12 months?”
In the early 1980s, respondents estimated that they would make about 4 to 5 percent more in the coming year. Over the 1990s and early in this decade, that figure dropped to about 2 percent. And then, with the recession, it dropped to nearly zero, where it has remained.
Moreover, the nation’s largest retailers, which monitor the pulse of American consumers most closely, have offered little good news in recent months.
During a recent call with analysts, William Simon, president of Wal-Mart U.S., noted that “customers remain under continued pressure.” They are trading down to cheaper products, choosing smaller packages and forgoing discretionary buying. More customers are relying on government assistance for food and other necessities. And the “paycheck cycle,” in which consumers buy less as they run out of money at the end of the month, “remains pronounced.”
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