Economy's Fate Hinges On Shoppers' Stamina

During a downturn, Americans are likely to search for ways to spend less on affordable luxuries such as clothing and restaurant meals.
During a downturn, Americans are likely to search for ways to spend less on affordable luxuries such as clothing and restaurant meals. (By Jeff Chiu -- Associated Press)
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By Neil Irwin
Washington Post Staff Writer
Tuesday, April 15, 2008

Their houses are less valuable, credit is harder to get and goods are more expensive. It is shaping up to be a hard year for American consumers.

Less clear is how these tough times will affect what people buy, and the answers will determine how the economy performs in 2008 because consumer spending accounts for about 70 percent of the U.S. economy.

New data released by the Commerce Department yesterday give an indication of how sales are holding up at retailers, early evidence of how the downturn is playing out among Americans.

Much of the data was unsurprising: In the first three months of the year, sales at auto dealers were down 2.5 percent compared with the same period of 2007, and sales at furniture dealers were down 5.9 percent. Those reflect consumers pulling back on big-ticket items. Sales rose 6.6 percent at grocery stores and 22.2 percent at gas stations, reflecting higher prices there.

More interesting, though, is how Americans are dealing with the wide range of purchases that are somewhere in between -- neither the basic necessities of life like food and gasoline, nor major purchases that can be delayed, such as a car or new couch.

Indeed it is in that middle ground of affordable luxuries that one can assess the impact of the downturn: restaurant meals, clothing, books and sporting goods. People who study consumer behavior say Americans are likely to search for ways to spend less on those types of goods while sacrificing as little of their quality of life as possible.

"What makes a recession a recession is ultimately the fact that people expect tomorrow to be worse than today," said Marc E. Babej, a partner in Reason, a New York marketing consultancy. "The common denominator in what people will look for is how to get the most bang for their buck. That means trying to get better value and more pleasure out of each dollar you spend."

For example, Babej said he has heard of people visiting their hairstylist for cuts just as frequently but cutting out trims and touch-ups between haircuts, or of cab drivers complaining that people continue to take taxis but are cutting back on tips.

Yesterday's retail data offer mixed evidence on these middle-ground expenditures. Sales at restaurants and bars rose 5.5 percent in the first three months of the year, though prices for food and alcohol have been rising at nearly that pace, so that likely reflects only a minimal increase in consumption.

A March report by market research firm NPD Group found that the number of visits to restaurants rose a weak 0.7 percent in 2007 and predicted that restaurants will suffer in the economic downturn.

The retail report had other mixed news about quasi-luxuries. Sales at clothing stores rose a weak 1.4 percent in the first three months of the year compared with a year earlier. But sales at sporting goods, hobby, book and music stores rose a solid 5.3 percent, to $20.4 billion. The question is whether that will continue in the months ahead.

In the last recession, in 2001, consumers kept spending, keeping that downturn brief. That recession was rooted in an over-expansion by corporate America. As the economy slowed, many people lost their jobs, but prices for food and energy remained low, credit remained easily available, and the housing market held up. That meant that those who did not lose their jobs were generally able to keep spending money.

But this downturn is being driven by factors that directly impact households, especially the drop in home values and less availability of the kind of credit that lets people borrow money to keep consuming as the economy slows. The government's response to this has been an economic stimulus package that next month will provide many consumers with $600 government checks. Researchers at the University of Michigan estimate that the money will result in an extra $30 billion to $35 billion in spending this year.

The question is whether that will be enough to give consumers the confidence to keep on shopping. A massive downturn in housing and the related problems in credit markets are uncharted territory for economists.

"The housing downturn is not a permanent story," said Michael Niemira, chief economist at the International Council of Shopping Centers. "But we could find that it makes for a longer correction than we're used to."

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