Pinched and Watching Pennies
Friday, October 3, 2008
For the past two decades, the nation could count on one thing to keep it going when economic times got tough: Consumers kept spending.
Real spending has been flat or down since June. The cutbacks have been so severe that many economists are predicting that the third quarter will show the first quarterly decline in consumer spending in 17 years -- effectively stalling the engine of the American economy.
Spending fuels about 70 percent of the nation's gross domestic product, and right now, consumers' pain is being felt across socioeconomic lines in ways both big and small. Stephen Morris, 39, of Centreville has been unemployed for months and his car was repossessed this summer. University of Maryland sophomore Richard Jackson, 19, was rejected for a student loan because of the credit crunch and is trying to cut back expenses. Missy Pokin of Fairfax, 52, is worried her husband, an architect, will be laid off.
"This affects everybody's life," Pokin said. "I keep my fingers crossed every day."
This was not the case during other recent economic downturns, when consumer spending remained, if not robust, at least on the rise. When the tech bubble burst in 2000, spending rose at a 2.5 percent annual rate the following quarter, adjusted for inflation. During the recession in 2001, spending simmered at a 1 to 2 percent growth rate. And when Hurricane Katrina struck in 2005, consumers continued pulling out their wallets to boost spending by 1.4 percent for the quarter. But today's economic environment is proving to be toxic for consumers, with some forecasters predicting spending to decline at a 1 to 2 percent annual rate in the coming quarters.
Unlike in previous years, consumers are grappling with significant inflation, particularly for necessities such as food and fuel, that are eating at their purchasing power. The consumer price index rose 4.3 percent during the second quarter of this year compared with the same period last year, the largest increase since the early 1990s. Meanwhile, real wages are decreasing and the unemployment rate has been rising since the summer to 6.1 percent in August, a five-year high.
That's bad news for consumers like Morris, who said he sees the effects of the economic downturn every time he walks down Main Street in Fairfax. "Help Wanted" signs used to be posted every few feet, he said. Now there's nothing.
He has done odd jobs over the past two years -- fixing HVAC or working with sheet metal -- but nothing steady. He and his girlfriend, Laura Golden, 39, have begun shopping at secondhand stores and taking the bus and Metro since their car was repossessed two months ago. Even though he has worked in construction for most of his life, he is thinking about trying to find a job in retail or another sector just to have a paycheck.
"I do not spend like I used to at all, even when I have the money," Morris said as he and Golden ate lunch from the Dollar Menu at a McDonald's in Fairfax. "I mean, even when you have it, you're scared to spend it."
Today's economic conditions resemble those of the recession of 1990 to 1991, when the nation was recovering from the savings and loan crisis, home values plummeted and the unemployment rate approached 7 percent. Then, consumer spending dropped for two consecutive quarters.
Pokin remembers how tight money was in those days. Her husband lost his architecture job and had to return to his home country of Thailand for three years until the U.S. economy improved. Now they are facing layoffs again. "This time is even worse," Pokin said. Several people at his new firm have been fired as work dries up, and he has taken a 25 percent salary cut. To save money, they opened the windows instead of running the air conditioner and have been filling the gas tank in their minivan only halfway.