April 5, 2008 in Business

Consumers tightening belts, saving for big-ticket purchases

Anne D'innocenzio Associated Press
 

NEW YORK – The gloomiest outlook for the economy in 35 years may be forcing Americans to live with what they have and save for what they want.

A growing number of anxious people across all income segments are shopping at less expensive stores, reacquainting themselves with the library, paying down credit card debt, and cutting back on new clothes and cars, vacations and meals out.

The psychology of the American consumer has turned as worries heighten about the job market, the slump in real estate and soaring cost of living.

Such spending cuts could be “a self-fulfilling prophesy” and hasten the economy’s slide, said Lynn Franco, director of the Conference Board Consumer Research Center.

“I don’t think (the spending slump) has bottomed out,” said Candace Corlett, principal at consulting firm WSL Strategic Retail. “Shoppers are learning a new behavior: how to resist temptation. There is a lot of fear out there.”

Such worries are driving shoppers to cut back on big-ticket items like appliances, delay redecorating their houses, and shop at discounters like Wal-Mart Stores Inc. and thrift stores for second-hand clothing. They’re particularly avoiding full-priced fashion chains and department stores at the mall.

Consumers have every right to be nervous – government data out Friday showed unemployment and job losses were higher than expected. It also reported only modest wage growth, which makes people feel like they are losing money as food and gas prices keep rising.

Shoppers’ economic outlook for the next six months is at a 35-year low, levels not seen since the oil embargo and Watergate scandal, according to a reading last week by the Conference Board, a business-backed research group. The report showed fewer consumers plan to buy big appliances like air conditioners, TVs and refrigerators in the next six months.

Retailers struggled through yet another sluggish month, with March sales at stores open at least a year expected to fall slightly from a year earlier, according to the International Council of Shopping Centers-UBS tally. J.C. Penney Co. warned last week of at least a 10 percent drop in same-store sales for March and slashed its first-quarter earnings forecast. Retailers are set to report final figures on Thursday.

Many analysts expect only a small sales lift starting in May when consumers begin receiving rebate checks from the federal government’s stimulus plan, but any bump should only be temporary. Michael P. Niemira, chief economist at the shopping center group, believes the malaise could extend into next year.

Consumers also are increasingly concerned about inflation, with the Energy Department anticipating gas prices will peak near $3.50 a gallon this spring. Many analysts believe prices could go much higher.

Mounting debt payments are also making shoppers cut back. U.S. families now spend more money on debt service, absorbing more than 14 percent of disposable income, than on food, which accounts for 13 percent, according to a Merrill Lynch & Co. report. That is higher than during the last recession in 2001, when 13.2 percent of household disposable income went toward debt, Merrill Lynch said.

That shows how “deep the credit problem is in terms of its impact on household cash flow,” wrote Merrill Lynch economist David Rosenberg.

Job security is key to consumers’ willingness to spend, and amid the persistently dreary news many are taking drastic measures.

Lynda Nicely has been living in a sparsely furnished rental apartment in a Milwaukee suburb since October, while she saves money for furniture at a second hand store. And when temperatures soar this summer, she plans to buy a fan, not an air conditioner.

The 28-year-old resident of West Allis, Wis., took a second job as a waitress and plans to set aside three months worth of emergency cash. “I am a little rattled,” she said.

Trend analyst Faith Popcorn, founder of the consulting firm BrainReserve, sees the “stripping down” trend as positive.

“I think we are going back to the ‘50s decade,” said Popcorn, who expects consumers will start growing food and learn to extend the life of worn garments by mending them.

Such a picture offers less comfort to Angela Durepo, of Cincinnati, who said she has cut back on buying clothes as higher gas and food prices consume more of her income.

“I’m also not going to the movies as much or buying CDs and other kinds of extras,” the legal secretary said. “I’m mostly shopping for groceries, hygiene products, gas for the car – things you have to have.”

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