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Pinched and Watching Pennies
Long a Bulwark of the Economy, Consumer Spending Stalls

By Ylan Q. Mui and V. Dion Haynes
Washington Post Staff Writers
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.

Not anymore.

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.

Confidence in the economy was higher in the earlier recession, according to the Reuters/University of Michigan Consumer Sentiment Index. At the low point during that 1990s recession, consumer confidence ranked 64 out of 100. Earlier this year, consumer confidence was in the 50s. A Gallup poll released this week showed that more than half of Americans feel they are worse off financially than they were a year ago, the lowest reading since 1976. And the continuing crisis on Wall Street is likely to continue the psychological damage.

That has consumers reining in spending for big-ticket items such as electronics, home renovations and autos, which experienced a 27 percent sales decline in September and prompted Richmond-based CarMax this week to lay off 600 people. According to consumer research firm BIGresearch, adults aged 35 to 54 report cutting back on big purchases at larger rates than other age groups. Nearly 32 percent said they are delaying a major purchase, compared with 23 percent of those older than 55.

Alethea Smalls, who is in her 40s, canceled plans to redecorate her master bedroom and bath. In the past, she and her husband had taken on a home improvement project each year -- updating the kitchen, landscaping their yard and installing a deck. With their federal government jobs, the Smalls earn more than $200,000 a year. But foreclosures across the street, around the corner and elsewhere in their Bowie neighborhood have left them uneasy about their finances.

"That could be us," she said. "We're not making less money, but we're more careful with the money we do have."

But it's not just the expensive items that are getting cut in these hard times. The Smalls drive instead of fly to visit friends in South Carolina. Alethea buys her food at discount membership warehouses such as BJ's. She checks out books from the library instead of buying new ones for her 6-year-old daughter. The holiday gift budget for her two children has been cut from $500 to $300.

At a Stride Rite in Wheaton, Emily Gould's 15-month-old son Alan was getting fitted for new shoes -- thanks to his grandma, who paid for them because Gould couldn't afford them.

Jackson, the University of Maryland sophomore, is resigning himself to hanging out in his dorm room instead of going out, watching TV instead of buying new movies. Such penny-pinching has become necessary because his family was rejected for a student loan, he said. Lending institutions have been tightening their underwriting standards, and his parents were unable to qualify because they had outstanding student loans of their own. His parents are paying the tuition while he applies for another loan.

"There is not as much money to go around, and we were too much of a risk," said Jackson, who paid for his first year with savings and a small loan.

The Rev. Melynda Clarke, a minister at Greater Mount Nebo African Methodist Episcopal Church in Bowie, said tuition and housing costs for son, who is in his last year at the University of Maryland Eastern Shore, rose 25 percent. She watched as the value of her childhood home in Baltimore, where her ailing sister and brother-in-law lived, dropped from $150,000 to $40,000 when the housing market collapsed. And at her church, she often listens to tales of economic distress from other members.

"It's challenging when you know people are affected by big increases in gas, energy and food," she said. "People are very concerned with what happened on Wall Street."

Staff photographer Kevin Clark contributed to this report.

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