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CHRISTMAS is nearly upon us. Americans, once again, are told that it’s our civic duty to shop. The economy demands increased consumer spending. And it’s true. The problem is that millions of lower- and middle-income households have lost their capacity to spend. They lack savings and are mired in debt. Although it would be helpful if affluent households spent more, we shouldn’t be calling upon a struggling majority to do so. In the long run, the health of the economy depends on the financial stability of our households.

What might we learn from societies that promote a more balanced approach to saving and spending? Few Americans appreciate that the prosperous economies of western and northern Europe are among the world’s greatest savers. Over the past three decades, Germany, France, Austria and Belgium have maintained household saving rates between 10 and 13 percent, and rates in Sweden recently soared to 13 percent. By contrast, saving rates in the United States dropped to nearly zero by 2005; they rose above 5 percent after the 2008 crisis but have recently fallen below 4 percent.

Unlike the United States, the thrifty societies of Europe have long histories of encouraging the broad populace to save. During the 19th century, European reformers and governments became preoccupied with creating prudent citizens. Civic groups founded hundreds of savings banks that enabled the masses to save by accepting small deposits. Central governments established accessible postal savings banks, whereby small savers could bank at any post office. To inculcate thrifty habits in the young, governments also instituted school savings banks. During the two world wars, citizens everywhere were bombarded with messages to save. Savings campaigns continued long after 1945 in Europe and Japan to finance reconstruction.

All this fostered cultures of saving that endure today in many advanced economies. The French government attracts millions of lower-income and young savers with its Livret A account available at savings banks, postal savings banks and all other banks. This small savers’ account is tax free, requires only a tiny minimum balance, and commonly pays above-market interest rates. In German cities, one cannot turn the corner without coming upon one of the immensely popular savings banks, called Sparkassen. Legally charged with encouraging the “savings mentality,” these banks offer no-fee accounts for the young and sponsor financial education in the schools.

Supported by public opinion, policy makers in European countries have also restrained the expansion of consumer and housing credit, lest citizens become “overindebted.” Home equity loans are rare in Germany, and Belgians, Italians and Germans are rarely offered an American-style credit card that allows the user to carry an unpaid balance.

How did America arrive at its widely divergent approach to saving and consumption? Seldom over the past two centuries has the federal government promoted saving; it left matters to the states or the market. In the 19th century, savings banks and building and loan associations did thrive in the Northeastern and Midwestern states; where they existed, working people saved at high rates. However, the vast majority of Americans in the Southern and Western states lacked access to any savings institution as late as 1910. Most Americans became regular savers only after the federal government decisively intervened to institute the Federal Deposit Insurance Corporation in 1934 and mass-market United States savings bonds in World War II.

The United States emerged from the war with unparalleled prosperity and hardly needed further savings campaigns. Instead politicians, businessmen and labor leaders all promoted consumption as the new driver of economic growth. Rather than democratize saving, the American system rapidly democratized credit. An array of federal housing and tax policies enabled Americans to borrow to buy homes and products as no other people could.

But from the 1980s, financial deregulation and new tax legislation spurred the growth of credit cards, home equity loans, subprime mortgages and predatory lending. Soaring home prices emboldened the financial industry to make housing and consumer loans that many Americans could no longer repay. Still, Americans wondered, why save when it is so easy to borrow? Only after housing prices collapsed in 2008 did they discover that wealth on paper is not the same as money in the bank.

As we seek to restore a balance between saving and consumption, what aspects of other nations’ experiences might we adapt to our circumstances? The new Consumer Financial Protection Bureau, while politically besieged, possesses broad powers to curb predatory lending. The bureau might also promote the creation of financial education programs in every school. Congress should consider ending costly tax incentives for wealthier savers and homebuyers while creating new incentives to encourage low- and middle-income people to save. Finally, federal intervention is needed to stop the banks from fleecing and driving away their poorest customers. If the banks cannot be encouraged to offer low-fee accounts for young and lower-income customers, the government might consider creating postal savings accounts for small savers.

To improve the balance sheets of America’s households, we must approach saving in a more forthright manner — not an easy thing to do when again and again we hear that individual prudence acts to impair the economy.

Sheldon Garon, a professor of history

and East Asian studies at Princeton,

is the author of “Beyond Our Means:

Why America Spends While the World Saves.”

Why We Spend, Why They Save,
NYT,
24.11.2011,
http://www.nytimes.com/2011/11/25/
opinion/why-we-spend-why-they-save.html

From Farm to Fridge to Garbage Can

November 1, 2010
5:27 pm
The New York Times
By TARA PARKER-POPE

How much food does your family waste?

A lot, if you are typical. By most estimates, a quarter to half of all food produced in the United States goes uneaten — left in fields, spoiled in transport, thrown out at the grocery store, scraped into the garbage or forgotten until it spoils.

A study in Tompkins County, N.Y., showed that 40 percent of food waste occurred in the home. Another study, by the Cornell University Food and Brand Lab, found that 93 percent of respondents acknowledged buying foods they never used.

And worries about food safety prompt many of us to throw away perfectly good food. In a study at Oregon State University, consumers were shown three samples of iceberg lettuce, two of them with varying degrees of light brown on the edges and at the base. Although all three were edible, and the brown edges easily cut away, 40 percent of respondents said they would serve only the pristine lettuce.

In his new book “American Wasteland: How America Throws Away Nearly Half of Its Food” (Da Capo Press), Jonathan Bloom makes the case that curbing food waste isn’t just about cleaning your plate.

“The bad news is that we’re extremely wasteful,” Mr. Bloom said in an interview. “The positive side of it is that we have a real role to play here, and we can effect change. If we all reduce food waste in our homes, we’ll have a significant impact.”

Why should we care about food waste? For starters, it’s expensive. Citing various studies, including one at the University of Arizona called the Garbage Project that tracked home food waste for three decades, Mr. Bloom estimates that as much as 25 percent of the food we bring into our homes is wasted. So a family of four that spends $175 a week on groceries squanders more than $40 worth of food each week and $2,275 a year.

And from a health standpoint, allowing fresh fruits, vegetables and meats to spoil in our refrigerators increases the likelihood that we will turn to less healthful processed foods or restaurant meals. Wasted food also takes an environmental toll. Food scraps make up about 19 percent of the waste dumped in landfills, where it ends up rotting and producing methane, a greenhouse gas.

A major culprit, Mr. Bloom says, is refrigerator clutter. Fresh foods and leftovers languish on crowded shelves and eventually go bad. Mr. Bloom tells the story of discovering basil, mint and a red onion hiding in the fridge of a friend who had just bought all three, forgetting he already had them.

“It gets frustrating when you forget about something and discover it two weeks later,” Mr. Bloom said. “So many people these days have these massive refrigerators, and there is this sense that we need to keep them well stocked. But there’s no way you can eat all that food before it goes bad.”

Then there are chilling and food-storage problems. The ideal refrigerator temperature is 37 degrees Fahrenheit, and the freezer should be zero degrees, says Mark Connelly, deputy technical director for Consumer Reports, which recently conducted extensive testing on a variety of refrigerators. The magazine found that most but not all newer models had good temperature control, although models with digital temperature settings typically were the best.

Vegetables keep best in crisper drawers with separate humidity controls.

If food seems to be spoiling quickly in your refrigerator, check to make sure you’re following the manufacturer’s care instructions. Look behind the fridge to see if coils have become caked with dust, dirt or pet hair, which can interfere with performance.

“One of the pieces of advice we give is to go to a hardware store and buy a relatively inexpensive thermometer,” Mr. Connelly said. “Put it in the refrigerator to check the temperature to make sure it’s cold enough.”

There’s an even easier way: check the ice cream. If it feels soft, that means the temperature is at least 8 degrees Fahrenheit and you need to lower the setting. And if you’re investing in a new model, don’t just think about space and style, but focus on the refrigerator that has the best sight lines, so you can see what you’re storing. Bottom-freezer units put fresh foods at eye level, lowering the chance that they will be forgotten and left to spoil.

Mr. Bloom also suggests “making friends with your freezer,” using it to store fresh foods that would otherwise spoil before you have time to eat them.

Or invest in special produce containers with top vents and bottom strainers to keep food fresh. Buy whole heads of lettuce, which stay fresher longer, or add a paper towel to the bottom of bagged lettuce and vegetables to absorb liquids. Finally, plan out meals and create detailed shopping lists so you don’t buy more food than you can eat.

Don’t be afraid of brown spots or mushy parts that can easily be cut away.

“Consumers want perfect foods,” said Shirley Van Garde, the now-retired co-author of the Oregon State study. “They have real difficulty trying to tell the difference in quality changes and safety spoilage. With lettuce, take off a couple of leaves, you can do some cutting and the rest of it is still usable.”

And if you do decide to throw away food, give it a second look, Mr. Bloom advises. “The common attitude is ‘when in doubt, throw it out,’” he said. “But I try to give the food the benefit of the doubt.”

From Farm to Fridge to Garbage Can, NYT, 1.11.2010,
http://well.blogs.nytimes.com/2010/11/01/from-farm-to-fridge-to-garbage-can/

A Reluctance to Spend

May Be a Legacy of the Recession

August 29, 2009
The New York Times
By PETER S. GOODMAN

AUSTIN, Tex. — Even as evidence mounts that the Great Recession has finally released its chokehold on the American economy, experts worry that the recovery may be weak, stymied by consumers’ reluctance to spend.

Given that consumer spending has in recent years accounted for 70 percent of the nation’s economic activity, a marginal shrinking could significantly depress demand for goods and services, discouraging businesses from hiring more workers.

Millions of Americans spent years tapping credit cards, stock portfolios and once-rising home values to spend in excess of their incomes and now lack the wherewithal to carry on. Those who still have the means feel pressure to conserve, fearful about layoffs, the stock market and real estate prices.

“We’re at an inflection point with respect to the American consumer,” said Mark Zandi, chief economist at Moody’s Economy .com, who correctly forecast a dip in spending heading into the recession, and who provided data supporting sustained weakness.

“Lower-income households can’t borrow, and higher-income households no longer feel wealthy,” Mr. Zandi added. “There’s still a lot of debt out there. It throws a pall over the potential for a strong recovery. The economy is going to struggle.”

In recent weeks, spending has risen slightly because of exuberant car buying, fueled by the cash-for-clunkers program. On Friday, the Commerce Department said spending rose 0.2 percent in July from the previous month. But most economists see this activity as short-lived, pointing out that incomes did not rise. Some suggest the recession has endured so long and spread pain so broadly that it has seeped into the culture, downgrading expectations, clouding assumptions about the future and eroding the impulse to buy.

The Great Depression imbued American life with an enduring spirit of thrift. The current recession has perhaps proven wrenching enough to alter consumer tastes, putting value in vogue.

“It’s simply less fun pulling up to the stoplight in a Hummer than it used to be,” said Robert Barbera, chief economist at the research and trading firm ITG. “It’s a change in norms.”

Here in Austin, a laid-back city on the banks of the Colorado River, change is palpable.

A decade ago, Heather Nelson gained a lucrative job in telecommunications and celebrated by buying a new Ford sport utility vehicle with leather seats and an expensive stereo system. Today, Ms. Nelson, 38, again has designs on a new vehicle, but this time she plans to buy a Toyota Prius, the fuel-efficient hybrid.

In December, Ms. Nelson was laid off from her six-figure job as a patent attorney at a local software firm. Self-assured, she exudes confidence she will land another high-paying position.

But even if her spending power is restored, Ms. Nelson says her inclination to buy has been permanently diminished. Through nine months of joblessness, she has learned to forgo the impulse buys that used to provide momentary pleasure — $4 lattes at Starbucks, lip gloss, mints. She has found she can survive without the pedicures and chocolate martinis that once filled regular evenings at the spa. Before punishing heat and drought turned much of central Texas brown, she subsisted primarily on vegetables harvested from her plot at a community garden, where only one oasis of flowers remains.

Once intent on buying a home, Ms. Nelson now feels security in remaining a renter, steering clear of the shark-infested waters of the mortgage industry.

“I’m having to shift my dreams to accommodate the new realities,” she said. “Now, I have more of a bunker mentality. If you get hit hard enough, it lasts. This impact is going to last.”

For years, Americans have tapped stock portfolios and borrowed against homes to fill wardrobes with clothes, garages with cars and living rooms with furniture and electronics. But stock markets have proven volatile. Home values are sharply lower. Banks remain reluctant to lend in the aftermath of a global financial crisis.

Households must increasingly depend upon paychecks to finance spending, a reality that seems likely to curb consumption: Unemployment stands at 9.4 percent and is expected to climb higher. Working hours have been slashed even for those with jobs.

Economists subscribe to a so-called wealth effect: as households amass wealth, they tend to expand their spending over the following year, typically by 3 to 5 percent of the increase.

Between 2003 and 2007 — prime years of the housing boom — the net worth of an American household expanded to about $540,000, from about $400,000, according to an analysis of federal data by Moody’s Economy.com.

Now, the wealth effect is working in reverse: by the first three months of this year, household net worth had dropped to $421,000.

“Not only have people lost money, but they don’t expect as much appreciation in the money they have, and that should affect consumption,” said Andrew Tilton, an economist at Goldman Sachs. “This is a cultural shift going on. People will save more.”

As recently as the middle of 2007, Americans saved less than 2 percent of their income, according to the Bureau of Economic Analysis. In recent months, the rate has exceeded 4 percent.

Austin has fared better than most cities during the recession. Increased government payrolls enabled by the state’s energy wealth have largely compensated for layoffs in construction and technology. Local unemployment reached 7.1 percent in June — well below the national average. Housing prices have mostly held. Yet even people with high incomes appear reluctant to spend.

“The only time you do a lot of business is when you throw a sale,” said Pat Bennett, a salesman at a Macy’s in north Austin. “You see very little impulse buying. They come in saying, ‘I need a pair of underwear,’ and they get it and leave. You don’t really see them saying, ‘Oh, I love the way that shirt looks, and I’m just going to get it.’ ”

Mr. Bennett attributes frugality to a general uneasiness about the future.

“Our parents had the Depression,” Mr. Bennett said. “This is like a mini-shock for the baby boomers after the go-go years.”

At a mall devoted to home furnishings, many storefronts were vacant, and survivors were draped in the banners of desperation: “Inventory Clearance,” “50% Off,” “It’s All On Sale.”

But at the Natural Gardener — a lush assemblage of demonstration plots that sells seeds, plants and tools for organic gardening — business has never been better.

Sales of vegetable plants swelled fivefold in March over past years. The company added a public address system and bleachers to accommodate hordes showing up for vegetable-growing classes.

Part of the embrace of gardening stems from concerns about the environment and food safety, says the company’s president, John Dromgoole. Momentum also reflects desire to save on food costs.

“People are very interested in shoring up against losing their jobs,” he said.

A Reluctance to Spend May Be a Legacy of the Recession,
NYT, 29.8.2009,
https://www.nytimes.com/2009/08/29/
business/economy/29consumer.html

Editorial

Real Consumer Protection

June 24, 2009
The New York Times

The federal consumer protection system failed the country, disastrously, in the years leading up to the mortgage crisis. One big cause was the sharing of responsibility for compliance with laws and regulations among several agencies that communicate poorly with each other and tend to put the bankers’ interests first and consumer protection second — if they pay attention to it all.

The Obama administration was right on the mark last week when it recognized this problem and proposed a solution: consolidating the far-flung responsibilities into a strong, new agency that focuses directly on consumer protection. The plan, modeled on a bill already introduced in the Senate by Richard Durbin, Democrat of Illinois, deserves broad support in Congress.

Before the current crisis, the lure of big money from Wall Street, which could not get enough of mortgage-backed securities, spread corruption right through the mortgage process. Banks and mortgage companies fed kickbacks to brokers, who often steered borrowers into high-risk, high-cost loans. Appraisers did their part by inflating property values so that people could borrow beyond their means.

Deceptive practices became the order of the day. Borrowers who thought they were getting traditional fixed-rate mortgages sometimes learned at the last minute that they had been given loans with escalating interest rates, exploding payments or complicated structures that they clearly did not understand.

Federal regulators were slow to recognize the rising threat to the economy. They were also vulnerable to “regulatory arbitrage” by the banks, which currently get to choose their own regulators. If one regulator seems too scrupulous, a bank can shift to another and then another, in search of the weakest possible oversight.

Federal regulators may even have accelerated the mortgage crisis by invalidating state laws that would have protected people from misleading and predatory lending practices. By pre-empting those tougher state laws, the regulators helped create an atmosphere in which risky lending practices became the norm.

The new agency envisioned by the Obama administration would put an end to this slippery practice. It would have authority over all banks, credit card companies, other credit-granting businesses and independent, nonbank mortgage companies, which are currently not covered by federal bank regulation.

One of the agency’s principal responsibilities would be to ensure that mortgage documents are clear and easy to understand. Federal rules would serve as a floor, not a ceiling, so that the states could pass even more stringent laws without fear of federal pre-emption. The administration also envisions a data-driven agency that would react swiftly to events like the ones that should have foreshadowed the subprime crisis.

In general, the new agency would require little in the way of new institutional infrastructure. As the administration notes in its proposal, three of the four federal banking agencies have mostly or entirely separated the consumer protection function from the rest of the agency. It would be a relatively simple matter to consolidate those divisions in a new, free-standing agency.

Congress should resist its typical urge to water down this plan for the special interests that write campaign checks but helped precipitate this crisis. Lawmakers need to bear in mind that consumer protection laws don’t just shield individuals. They also protect the economy. That’s a good argument for building a strong, effective consumer protection agency.

Real Consumer Protection, NYT, 24.6.2009,
http://www.nytimes.com/2009/06/24/opinion/24wed1.html

Economy Shrank In Third Quarter

as Consumers Retreat

October 30, 2008
Filed at 9:02 a.m. ET
The New York Times
By REUTERS

WASHINGTON (Reuters) - The U.S. economy shrank at a 0.3 percent annual rate in the third quarter, its sharpest contraction in seven years as consumers cut spending and businesses reduced investment in the face of rising fears that recession was setting in.

The Commerce Department said the third-quarter contraction in gross domestic product was the steepest since the corresponding quarter in 2001 though it was slightly less than the 0.5 percent rate of reduction that Wall Street economists surveyed by Reuters had forecast.

The third-quarter contraction was a striking turnaround from the second quarter's relatively brisk 2.8 percent rate of growth. It occurred when financial market turmoil that has heightened concerns about a potentially lengthy U.S. recession.

Consumer spending, which fuels two-thirds of U.S. economic growth, fell at a 3.1 percent rate in the third quarter - the first cut in quarterly spending since the closing quarter of 1991 and the biggest since the second quarter of 1980. Spending on nondurable goods - items like food and paper products - dropped at the sharpest rate since late 1950.

Continuing job losses coupled with declining gains from stocks and other investments have put consumers under severe stress. The GDP report showed that disposable personal income dropped at an 8.7 percent rate in the third quarter - the steepest since quarterly records on this component were started in 1947 -- after rising 11.9 percent in the second quarter when most of economic stimulus payments still were flowing.

Consumers cut spending on durable goods like cars and furniture at a 14.1 percent annual rate in the third quarter, the biggest cut in this category of spending since the beginning of 1987. Car dealers have said that sales have virtually stalled, in part because tight credit makes it hard for even creditworthy buyers to get loans.

Businesses also were clearly wary about the future, cutting investments at a 1 percent rate after boosting them 2.5 percent in the second quarter. It was the first reduction in business investment since the end of 2006. Inventories of unsold goods backed up at a $38.5-billion rate in the third quarter after rising $50.6 billion in the second quarter.

Prices were still rising relatively strongly in the third quarter, with the personal consumption expenditures index up at a 5.4 percent annual rate, the sharpest since early 1990. Even excluding volatile food and energy items, core prices grew at a 2.9 percent rate, up from the second quarter's 2.2 percent rise.

However, many commodity prices in October have begun to ease and the Federal Reserve indicated on Wednesday when it slashed interest rates again that its concern for the future was focused more heavily on weak growth than on inflation.

(Reporting by Glenn Somerville, editing by Neil Stempleman)

Economy Shrank In Third Quarter as Consumers Retreat, NYT, 30.10.2008,
http://www.nytimes.com/reuters/business/business-us-usa-economy.html

Op-Ed Contributor

Dying of Consumption

November 28, 2008
The New York Times
By STEPHEN S. ROACH

Hong Kong

IT’S game over for the American consumer. Inflation-adjusted personal consumption expenditures are on track for rare back-to-back quarterly declines in the second half of 2008 at a 3.5 percent average annual rate. There are only four other instances since 1950 when real consumer demand has fallen for two quarters in a row. This is the first occasion when declines in both quarters will have exceeded 3 percent. The current consumption plunge is without precedent in the modern era.

The good news is that lines should be short for today’s “first shopping day” of the holiday season. The bad news is more daunting: rising unemployment, weakening incomes, falling home values, a declining stock market, record household debt and a horrific credit crunch. But there is a deeper, potentially positive, meaning to all this: Consumers are now abandoning the asset-dependent spending and saving strategies they embraced during the bubbles of the past dozen years and moving back to more prudent income-based lifestyles.

This is a painful but necessary adjustment. Since the mid-1990s, vigorous growth in American consumption has consistently outstripped subpar gains in household income. This led to a steady decline in personal saving. As a share of disposable income, the personal saving rate fell from 5.7 percent in early 1995 to nearly zero from 2005 to 2007.

In the days of frothy asset markets, American consumers had no compunction about squandering their savings and spending beyond their incomes. Appreciation of assets — equity portfolios and, especially, homes — was widely thought to be more than sufficient to make up the difference. But with most asset bubbles bursting, America’s 77 million baby boomers are suddenly facing a savings-short retirement.

Worse, millions of homeowners used their residences as collateral to take out home equity loans. According to Federal Reserve calculations, net equity extractions from United States homes rose from about 3 percent of disposable personal income in 2000 to nearly 9 percent in 2006. This newfound source of purchasing power was a key prop to the American consumption binge.

As a result, household debt hit a record 133 percent of disposable personal income by the end of 2007 — an enormous leap from average debt loads of 90 percent just a decade earlier.

In an era of open-ended house price appreciation and extremely cheap credit, few doubted the wisdom of borrowing against one’s home. But in today’s climate of falling home prices, frozen credit markets, mounting layoffs and weakening incomes, that approach has backfired. It should hardly be surprising that consumption has faltered so sharply.

A decade of excess consumption pushed consumer spending in the United States up to 72 percent of gross domestic product in 2007, a record for any large economy in the modern history of the world. With such a huge portion of the economy now shrinking, a deep and protracted recession can hardly be ruled out. Consumption growth, which averaged close to 4 percent annually over the past 14 years, could slow into the 1 percent to 2 percent range for the next three to five years.

The United States needs a very different set of policies to cope with its post-bubble economy. It would be a serious mistake to enact tax cuts aimed at increasing already excessive consumption. Americans need to save. They don’t need another flat-screen TV made in China.

The Obama administration needs to encourage the sort of saving that will put consumers on sounder financial footing and free up resources that could be directed at long overdue investments in transportation infrastructure, alternative energy, education, worker training and the like. This strategy would not only create jobs but would also cut America’s dependence on foreign saving and imports. That would help reduce the current account deficit and the heavy foreign borrowing such an imbalance entails.

We don’t need to reinvent the wheel to come up with effective saving policies. The money has to come out of Americans’ paychecks. This can be either incentive driven — expanded 401(k) and I.R.A. programs — or mandatory, like increased Social Security contributions. As long as the economy stays in recession, any tax increases associated with mandatory saving initiatives should be off the table. (When times improve, however, that may be worth reconsidering.)

Fiscal policy must also be aimed at providing income support for newly unemployed middle-class workers — particularly expanded unemployment insurance and retraining programs. A critical distinction must be made between providing assistance for the innocent victims of recession and misplaced policies aimed at perpetuating an unsustainable consumption binge.

Crises are the ultimate in painful learning experiences. The United States cannot afford to squander this opportunity. Runaway consumption must now give way to a renewal of saving and investment. That’s the best hope for economic recovery and for America’s longer-term economic prosperity.

Stephen S. Roach is the chairman of Morgan Stanley Asia.

Dying of Consumption, NYT, 28.11.2008,
http://www.nytimes.com/2008/11/28/opinion/28roach.html

Economic Scene

Buying Binge Slams to Halt

November 12, 2008
The New York Times
By DAVID LEONHARDT

Just as one crisis of confidence may be ending, another may be coming.

The panic on Wall Street has eased in the last few weeks, and banks have become somewhat more willing to make loans. But in those same few weeks, American households appear to have fallen into their own defensive crouch.

Suddenly, our consumer society is doing a lot less consuming. The numbers are pretty incredible. Sales of new vehicles have dropped 32 percent in the third quarter. Consumer spending appears likely to fall next year for the first time since 1980 and perhaps by the largest amount since 1942.

With Wall Street edging back from the brink, this crisis of consumer confidence has become the No. 1 short-term issue for the economy. Nobody doubts that families need to start saving more than they saved over the last two decades. But if they change their behavior too quickly, it could be very painful.

Already, Circuit City has filed for bankruptcy, and General Motors has said that it’s in danger of running out of cash. If the consumer slump continues, there is a potential for a dangerous feedback loop, in which spending cuts and layoffs reinforce each other.

“It’s a scary time,” Liz Allen, 29, a nursing student in Atlanta, told one of the Times reporters who fanned out across the country last weekend to ask people about the economy. “Worry can make the economy worse. If people worry too much, they won’t spend as much money. We’re seeing that happen, I think, already.”

It’s not entirely clear what anyone, including Barack Obama and his incoming administration, can do to temper the current worries. Mr. Obama has called for a stimulus package, which will make up for some of the consumer pullback. He and his advisers will also try to shore up confidence by projecting both a calm competence and a willingness to be more aggressive than the Bush administration. All of that should help.

But the stimulus package under discussion would bring no more than $150 billion in new government spending. The difference between a good year for consumer spending and a really bad one is about $400 billion.

So 2009 could turn out to be fairly miserable. The American consumer, long the spender of last resort for the global economy, may finally be spent.

•

You have heard such warnings before, I realize. For years, journalists and other economic worrywarts have been predicting a serious slump in consumer spending, and it did not happen. “Never underestimate the American consumer,” as a Wall Street cliché puts it.

Like most clichés, this one has some truth to it. Even before its recent housing-fueled boom, consumer spending was a bigger part of the American economy than of, say, the French or German economy. Americans like to buy things, and they also don’t tend to stay pessimistic for long.

Andrew Kohut, president of the Pew Research Center, noted that his recent polls showed a sharp rise in the number of people planning to cut back on spending — but also a clear increase in the number who expected the economy to be in better shape next year. “What the American economy has going for it is the innate optimism of the public,” he said. “Americans get optimistic at the drop of a hat.”

Perhaps falling gas prices or Mr. Obama’s victory will shake them out of their torpor, Mr. Kohut said. A recent Gallup Poll found that consumer confidence rose slightly after the election. (Links to the Pew and Gallup research are at nytimes.com/economix.) Based on recent history, it’s easy to imagine that the trend will continue and spending will soon bounce back.

Yet if the last year has proven anything, it’s that we should not assume something can’t happen simply because it hasn’t happened recently. Cold economic realities deserve the benefit of the doubt, even when they point to uncomfortable conclusions. And right now, the economic realities are pointing to a serious consumer recession.

Let’s start with the job market. It “already appears to be in worse shape than at any time during the recessions of the early 1990s or early 2000s,” says Lawrence Katz, a Harvard professor and former Labor Department chief economist. Unemployment is higher than the official rate suggests, and it is rising. Incomes, which for most families barely kept pace with inflation over the past decade, are now falling.

In all, the total amount of income taken home by American households will still probably rise next year, because the population will grow and government transfer payments (like jobless benefits) will surely increase. But total real income will rise a lot more slowly than it has been rising recently. One percent is a reasonable estimate.

The next question is how much of that income people will spend. For decades — from the 1950s through the 1980s — Americans spent about 91 percent of their income, on average, and put away the rest. In the last few years, they have spent close to 99 percent and saved only about 1 percent.

This simply cannot continue. For one thing, people need to pay down their debts and replenish their retirement accounts. For another, the psychology of spending and saving may well be changing. After the worst housing bust on record and one of the three worst bear markets of the last century, Americans are probably starting to realize that they can’t always fall back on ever-rising house values or stock values to make ends meet.

In the unlikely event that Mr. Obama decided to mimic President Bush’s post-9/11 plea for spending in the name of patriotism, it probably would not have the same impact. We’re not as flush as we were in 2001.

Economists are now busy trying to forecast how rapidly people will begin saving again, but it’s essentially an exercise in guesswork. There is no good historical analogy. A savings rate of about 3 percent seems plausible — higher, but not radically so — and that’s what some forecasters are projecting.

At that rate, consumer spending would decline about 1 percent next year, which is worse than it sounds. It would be the first annual decline since 1980, as I mentioned above, and the biggest since 1942. Relative to the typical increases from recent years, it would represent $400 billion in lost consumer spending. To find a stimulus package so big, you’d have to go to Beijing.

And get this: Spending in the last few months has actually been falling at an annual rate of 3 percent. So the seemingly pessimistic events I have sketched out here are based on the assumption that things are about to get better.

As Joshua Shapiro of MFR, an economic research firm in New York, puts it, the American consumer has quickly gone from being the world economy’s greatest strength to its Achilles’ heel. “Everything has changed,” he says. “The financial sector is deleveraging. Credit availability is severely constrained. Asset prices are deflating. And household balance sheets are severely stressed.”

It would be silly to insist that a few terrible months meant the end of American consumer culture. But it would be equally silly to assume that culture could never change. It might be changing right now.

Robbie Brown, Sean Hamill and John Dougherty contributed reporting.

Buying Binge Slams to Halt, NYT, 12.11.2008,
http://www.nytimes.com/2008/11/12/business/economy/12leonhardt.html

NYC

We’re All Bankers Now.

So Why’s the A.T.M. Still Charging Us $2?

October 31, 2008
The New York Times
By CLYDE HABERMAN

According to our math, not the most reliable of guides, each taxpayer in this country has a $1,785.71 ownership share in the banks of America.

This figure is based on the $250 billion that the Treasury Department is investing in banks to prod them to start lending again. We divided $250 billion by 140 million, which the Internal Revenue Service says is the number of individual tax returns filed last year. By our count, that gives every taxpayer a $1,785.71 stake in JPMorgan Chase, Citigroup, Wells Fargo, Bank of America and the rest.

(In that 140 million, we are not including Charles J. O’Byrne, who resigned under fire as Gov. David A. Paterson’s top lieutenant. We can’t be sure that Mr. O’Byrne has fully recovered from what his lawyer calls late-filing syndrome when it comes to his taxes. Also excluded is Joe the Publicity-Hungry Unlicensed Plumber. Public records have shown that Joe suffers from Sticky Fingers Syndrome in paying all that he owes.)

Far be it for us to tell Henry M. Paulson Jr., the treasury secretary, or Ben S. Bernanke, the Federal Reserve chairman, how to manage $250 billion. They’re the brains. And they’re doing a heck of a job. Thanks to all that brilliance in Washington and on Wall Street, the rest of us now know how to make a small fortune: by investing a large fortune.

But as shareholders, we have thoughts on aspects of banking that seem beyond the scope of Messrs. Paulson and Bernanke. Call them small-bore issues. But they affect ordinary people every day.

Let’s start with something really easy. Is it too much to ask that all banks have pens that work on the counters with the deposit and withdrawal slips? In too many places, the pens are useless. How can people feel confident that their money is being managed wisely if those in charge can’t even provide a functioning pen?

As shareholders, we were going to suggest that the top executives of the banks forgo end-of-year bonuses, but Andrew M. Cuomo, New York’s attorney general, was ahead of us. He sent a letter on Wednesday to nine big financial institutions asking for information about their plans in this regard. It doesn’t guarantee that mega-bonuses are finished. But, really, why should we give a dime to executives who had to come to us hat in hand? Better to give an extra buck or two to the guy in the subway with an outstretched plastic cup.

How about a moratorium on new bank branches in New York neighborhoods? The tanking economy will probably take care of that anyway. But an ironclad agreement by the banks to halt further expansion would delight New Yorkers. Many are infuriated as they watch cherished local stores die and give way to impersonal bank outlets, often located within yards of one another. Enough is enough.

Why not forbid any bank receiving taxpayer money to purchase naming rights to sports stadiums and arenas? Citigroup is handing the Mets something like $20 million a year to call their new stadium Citi Field. Surely, the Mets do not need Citigroup’s money — not to mention yours — to keep failing to make the playoffs.

Might we end the procedure by which banks stiff you when you deposit a large check? Often, you are initially credited with only part of the deposit, and must wait a few days to gain access to the rest. Meanwhile, the bank is using the withheld portion to pick up a few bucks for itself. Check-clearance times have been speeded up in recent years. But why shouldn’t depositors be able to get at their money immediately, all of it?

For that matter, why must bank customers pay several times to retrieve cash at an A.T.M. (known to some as short for Always Taking Money)? If you use an A.T.M. at a bank other than your own, that bank usually charges you a fee. Fair enough. But your own bank also charges you for the same transaction. So you pay twice for the privilege — no, make that the right — to withdraw your own money. How is that?

As long as we have $1,785.71 at stake, can’t we ask that banks have recognizable names?

A few years ago, something called Sovereign Bank began popping up all over town. We’d never heard of Sovereign. Now, just as we’ve been getting used to the name, we learn that Sovereign has had it.

A full-page advertisement in Thursday’s paper announced that Sovereign had been taken over by a company called Santander. What in the name of the Bailey Savings and Loan is Santander?

Turns out that the full name is Banco Santander, based in Spain. Want to bet that Santander left out “banco,” except in very small type at the bottom of the ad, so that few would see right away that another piece of America had been acquired by a foreign institution.

Sovereign, we hardly knew ye. But at least you didn’t go by a dopey moniker like WaMu. That’s what Washington Mutual called itself before it, too, flopped. The name WaMu will soon be gone, whammo!

Here’s hoping the same doesn’t happen to our $1,785.71.

We’re All Bankers Now. So Why’s the A.T.M. Still Charging Us $2?, NYT, 31.10.2008,
http://www.nytimes.com/2008/10/31/nyregion/31nyc.html

Op-Ed Columnist

When Consumers Capitulate

October 31, 2008
The New York Times
By PAUL KRUGMAN

The long-feared capitulation of American consumers has arrived. According to Thursday’s G.D.P. report, real consumer spending fell at an annual rate of 3.1 percent in the third quarter; real spending on durable goods (stuff like cars and TVs) fell at an annual rate of 14 percent.

To appreciate the significance of these numbers, you need to know that American consumers almost never cut spending. Consumer demand kept rising right through the 2001 recession; the last time it fell even for a single quarter was in 1991, and there hasn’t been a decline this steep since 1980, when the economy was suffering from a severe recession combined with double-digit inflation.

Also, these numbers are from the third quarter — the months of July, August, and September. So these data are basically telling us what happened before confidence collapsed after the fall of Lehman Brothers in mid-September, not to mention before the Dow plunged below 10,000. Nor do the data show the full effects of the sharp cutback in the availability of consumer credit, which is still under way.

So this looks like the beginning of a very big change in consumer behavior. And it couldn’t have come at a worse time.

It’s true that American consumers have long been living beyond their means. In the mid-1980s Americans saved about 10 percent of their income. Lately, however, the savings rate has generally been below 2 percent — sometimes it has even been negative — and consumer debt has risen to 98 percent of G.D.P., twice its level a quarter-century ago.

Some economists told us not to worry because Americans were offsetting their growing debt with the ever-rising values of their homes and stock portfolios. Somehow, though, we’re not hearing that argument much lately.

Sooner or later, then, consumers were going to have to pull in their belts. But the timing of the new sobriety is deeply unfortunate. One is tempted to echo St. Augustine’s plea: “Grant me chastity and continence, but not yet.” For consumers are cutting back just as the U.S. economy has fallen into a liquidity trap — a situation in which the Federal Reserve has lost its grip on the economy.

Some background: one of the high points of the semester, if you’re a teacher of introductory macroeconomics, comes when you explain how individual virtue can be public vice, how attempts by consumers to do the right thing by saving more can leave everyone worse off. The point is that if consumers cut their spending, and nothing else takes the place of that spending, the economy will slide into a recession, reducing everyone’s income.

In fact, consumers’ income may actually fall more than their spending, so that their attempt to save more backfires — a possibility known as the paradox of thrift.

At this point, however, the instructor hastens to explain that virtue isn’t really vice: in practice, if consumers were to cut back, the Fed would respond by slashing interest rates, which would help the economy avoid recession and lead to a rise in investment. So virtue is virtue after all, unless for some reason the Fed can’t offset the fall in consumer spending.

I’ll bet you can guess what’s coming next.

For the fact is that we are in a liquidity trap right now: Fed policy has lost most of its traction. It’s true that Ben Bernanke hasn’t yet reduced interest rates all the way to zero, as the Japanese did in the 1990s. But it’s hard to believe that cutting the federal funds rate from 1 percent to nothing would have much positive effect on the economy. In particular, the financial crisis has made Fed policy largely irrelevant for much of the private sector: The Fed has been steadily cutting away, yet mortgage rates and the interest rates many businesses pay are higher than they were early this year.

The capitulation of the American consumer, then, is coming at a particularly bad time. But it’s no use whining. What we need is a policy response.

The ongoing efforts to bail out the financial system, even if they work, won’t do more than slightly mitigate the problem. Maybe some consumers will be able to keep their credit cards, but as we’ve seen, Americans were overextended even before banks started cutting them off.

No, what the economy needs now is something to take the place of retrenching consumers. That means a major fiscal stimulus. And this time the stimulus should take the form of actual government spending rather than rebate checks that consumers probably wouldn’t spend.

Let’s hope, then, that Congress gets to work on a package to rescue the economy as soon as the election is behind us. And let’s also hope that the lame-duck Bush administration doesn’t get in the way.

When Consumers Capitulate, NYT, 31.10.2008,
http://www.nytimes.com/2008/10/31/opinion/31krugman.html

Economy Shrank In Third Quarter

as Consumers Retreat

October 30, 2008
Filed at 9:02 a.m. ET
The New York Times
By REUTERS

(Reporting by Glenn Somerville, editing by Neil Stempleman)

Economy Shrank In Third Quarter as Consumers Retreat, NYT, 30.10.2008,
http://www.nytimes.com/reuters/business/business-us-usa-economy.html

Consumers Gloomiest Ever

as Home Prices Plunge

October 28, 2008
Filed at 12:12 p.m. ET
The New York Times
By REUTERS

NEW YORK (Reuters) - U.S. consumer confidence dived to a record low in October as plunging home values and a severe financial crisis left Americans anxious about their jobs and pessimistic about the future.

The Conference Board said on Tuesday its index measuring consumer sentiment tumbled to 38.0 in October, down from 61.4 in September and the lowest reading since the index was first published back in 1967.

One factor depressing Americans was the rapidly declining value of their homes. U.S. single-family home prices dropped a record 16.6 percent in August from a year earlier and plummeted more than 30 percent in Las Vegas and Phoenix, Standard & Poor's said on Tuesday.

This was making consumers feel a lot less wealthy and dampening their spending, on which U.S. economic growth so keenly depends.

"Consumers are completely shut down at this point," said Lindsey Piegza, a market analyst at FTN Financial. "They see no end in sight even with all the actions that the government has taken."

The government has indeed done a lot. The Federal Reserve was expected to cut interest rates yet again this week to prop up the economy and try to stimulate lending, while the Treasury seemed to be trying to broaden its support of industry to include insurers and automakers.

Yet none of this has stopped the carnage in the stock market, which on Tuesday was struggling to hold in positive territory, and has already fallen nearly 25 percent in October alone.

The losses have also spread globally, with emerging markets showing an even more virulent reaction to the prospect of a global recession, and theories about a possible "decoupling" from the United States now shown to be largely implausible.

HOLE IN THE BUDGET

The frantic efforts of U.S. financial authorities to restore calm in the markets will also clearly come at a large long-term cost to taxpayers. Anthony Ryan, the Treasury's acting undersecretary for domestic finance, said on Tuesday the government faces huge borrowing needs this year to finance the multiple programs aimed at soothing investors' nerves.

Against this backdrop, it is not hard to see why consumers had grown so glum. In the Conference Board survey, the present situation index fell to 41.9, its lowest since December 1992, from 61.1 in September The expectations subindex plunged to a record low of 35.5 from an upwardly revised 61.5 last month and from 80.0 a year ago.

The number of respondents who said jobs are "hard to get" rose to 37.2 percent from 32.2, while those saying jobs were "plentiful" fell to 8.9 percent from 12.6.

Housing was another centerpiece of the economy's woes. According to S&P, home prices in its narrower index of 10 metropolitan areas declined 1.1 percent from July to August alone, and were down 17.7 percent from a year ago.

"The downturn in residential real estate prices continued, with very few bright spots in the data," David M. Blitzer, chairman of the Index Committee at Standard & Poor's, said in the statement.

(Reporting by Steven S. Johnson, Pedro Nicolaci da Costa and Julie Haviv;

Editing by Andrea Ricci)

Consumers Gloomiest Ever as Home Prices Plunge, NYT, 28.10.2008,
http://www.nytimes.com/reuters/business/business-us-usa-economy.html

Yard Sales Boom,

and Sentiment Is First Thing to Go

October 25, 2008
The New York Times
By PATRICIA LEIGH BROWN

MANTECA, Calif. — As the classified ads put it, everything must go. Socks. Christmas ornaments. Microwave ovens. Three-year-old Marita Duarte’s tricycle was sold by her mother, Beatriz, to a stranger for $3 even as her daughter was riding it.

On Mission Ridge Drive and other avenues, lanes and ways in this formerly booming community, even birthday celebrations must go. “It was no money, no birthday,” said Ms. Duarte, who lost her job as a floral designer two months ago. The family commemorated Marita’s third birthday without presents last week, the occasion marked by a small cake with Cinderella on the vanilla frosting. They will move into a rental apartment next month.

An eternity ago, people in this city in northern San Joaquin County braved four-hour round-trip commutes to the San Francisco Bay Area for a toehold on the dream. Today, Manteca’s lawns and driveways are storefronts of the new garage-sale economy — the telltale yellow signs plastered in the rear windows of parked cars Friday through Sunday directing traffic to yet another sale, yet another family.

“You can get great deals,” said Sharrell Johnson, 32, who was scouting for toys in the Indian summer heat last Friday amid boxes of tools and DVDs and forests of little skirts and shirts dangling from plastic hangers on suspended rope. “Sad to say, you’re finding really good things. Because everybody’s losing their homes.”

The garage-sale economy is flourishing here and in many other regions of the country, so much so that some cities have begun cracking down. With more residents trying to increase their income, the city of Weymouth, Mass., limited yard sales to just three a year per address. Detective Sgt. Richard Fuller said it was now common to see 15 cars parked in front of a house.

Richmond, Ind., has had such an onslaught of garage sale signs posted in the right of way that the city has placed stickers on prominent light poles warning of violations and fines.

But it is a Sisyphean task: Manteca’s ordinance, restricting residents to two sales a year, is widely ignored.

The sales are part of the once-underground “thrift economy,” as a team of Brigham Young University sociologists have called it, which includes thrift stores, pawn shops and so-called recessionistas name-brand shopping at Goodwill.

“This is the perfect storm for garage sales,” said Gregg Kettles, a visiting professor at Loyola Law School in Los Angeles who studies outdoor commerce. “We’re coming off a 20-year boom in which consumers filled ever-bigger houses. Now people need cash because of the bust.”

And so the garages and yards of Manteca, some tinder-dry from neglect, offer a crash course in kitchen-table economics each weekend. On Klondike Way: “Tools, various household items, & much more!” On Virginia Street: “Moving Sale! Fridge, washer & dryer, men’s clothing, bike, BBQ, dinette, dresser, fans, microwaves, recliner, DVD player. Everything must go!”

When life’s daily trappings and keepsakes are laid out for sale on a collapsible table, sentiment is the first thing to go. “The cash helps a lot,” Constantino Gonzalez, Ms. Duarte’s neighbor, said of the family’s second sale in two weeks, in which he and his wife, Julia, were reluctantly selling their children’s inflatable bounce house for $650, with pump.

Since losing his construction job, Mr. Gonzalez, 43, has been economizing, disconnecting the family’s Internet and long-distance telephone service, and barely using his truck and the Jeep, strewn with leaves in the driveway. He has taken to picking up his children from school on his bicycle, with 6-year-old Daniel on the handlebars, cushioned by a terry-cloth towel.

The inflatable bounce house is the children’s favorite toy, but the family’s $1,800 mortgage payment is coming. So it sits propped up in its bright blue case, awaiting customers, many of them desperate themselves. Customers are searching for bargains on necessities so they might chip away at the rent, the truck payment, the remodeling bill on the credit card.

“We need to eat,” Mr. Gonzalez tells his children about selling off their toys. “I can’t cover the sun with my finger. So why lie?”

As he spoke, he watched his neighbor across the street pull out of her driveway with her family for the last time, their pickup truck piled high with chairs, firewood and other belongings, like modern Joads from Steinbeck’s “Grapes of Wrath.” “Bad loan,” explained the neighbor, Alex Martinez, who works nights at an automobile assembly plant in faraway Fremont. The garage sale she had held the week earlier barely made a dent.

As the family drove off, a woman with frosted hair wearing high heels got out of a parked car and placed a sign in the window of the former Martinez place: “Coming Soon: Innovative Realty.”

This is McCain-Palin placard country, where signs for the anti-gay-marriage state ballot measure, “Yes on 8,” pepper the landscape and billboards advertising “Buy Now/Low Rates" seem like grim fossils of a bygone age. Manteca lies at an epicenter of the foreclosure crisis, with median home values having fallen by nearly half since 2006, from $440,000 to the current $225,000. In San Joaquin County, Moody’s has estimated that more than 1 in 10 houses with mortgages have a payment that is more than 30 days late. Unemployment rates have increased by a third, from 7.6 percent in September 2007 to 10.2 percent this fall, said Hans Johnson, a demographer at the Public Policy Institute of California.

Before the downturn, Manteca, population 67,700, and other towns in the northern San Joaquin Valley were on the leading edge of growth, with stucco subdivisions carved out of almond orchards. Today some 1,500 to 2,000 homes in Manteca, which is 32.7 percent Hispanic, are in various stages of foreclosure.

Paul Farnsworth’s garage on Widgeon Way was a latter-day five and dime, his driveway an eclectic assortment of artificial flowers, cookie jars, decanters, spotlights, radar detectors, Hot Wheels miniature cars, a Dirt Devil. Mr. Farnsworth’s recent garage sales supplement his income as a manager for a beverage distributor, which pays about half of what he made as an apricot and cherry farmer in nearby Tracy. (He was laid off when the farm was sold.) Neither he nor his wife Ann, a beautician, can afford to retire.

“People want things for half, and I don’t blame them,” observed Mr. Farnsworth, 65, adding that only one couple that morning had not dickered on the price. His own house, appraised at $375,000 three years ago, is worth $200,000 today. He has resorted to holding garage sales “to help make payments on a house that’s worth less than what I owe,” he said, the irony not lost on him.

Ebi Yeri’s yard held big-ticket items: beds, a smoked-glass and black lacquer dinette set and — the pièce de résistance — a 51-inch Hitachi projection television that he had replaced with a plasma flat screen. Still, it pained Mr. Yeri to sell. He had it set thematically to the HGTV channel, figuring that “a judge show might offend somebody.”

Mr. Yeri, 35, was decluttering to offset losses in his 401(k), which he described as “in the tank.” He said he also cut costs by being “lighter on the foot,” driving 10 miles an hour slower than the speed limit on his 156-mile commute to and from his software job in San Jose.

On Chenin Blanc Drive, Robert Dadey, a car salesman, was holding his 20th garage sale. “I need money,” he said simply about selling the Oakland Raiders memorabilia, teddy bears and $40 brown ultrasuede recliner in his midst on the lawn. “It’s bad times.”

Yard Sales Boom, and Sentiment Is First Thing to Go, NYT, 25.10.2008,
http://www.nytimes.com/2008/10/25/us/25garage.html

As Consumers Keep Wallets Shut,

Economic Outlook Dims

October 16, 2008
The New York Times
By MICHAEL M. GRYNBAUM

Even as the federal government and its counterparts around the world readied an ambitious financial bailout, more signs emerged on Wednesday that the economic downturn had taken a darker turn.

Retail sales fell sharply in September as consumers shunned department stores, auto showrooms and shopping malls, ratcheting back spending for a third month. Economic activity slowed, according to a report from the Federal Reserve. And the Fed chairman, Ben S. Bernanke, warned in a speech that a recovery “will not happen right away.”

Each bleak economic report compounded on the last, and by the end of the day the Dow Jones industrial average had fallen 733 points. Many investors fear that corporations — and by extension their workers and shareholders — will face harder times.

The key troubles lie with the American consumer, who, after months of coping with soaring gasoline prices, is faced with losses in the stock market and an uncertain financial future.

The impact of the crisis on Wall Street put a clear dent in consumer spending. Last month’s 1.2 percent decline in retail sales was the sharpest drop in years, and it came in the back-to-school shopping season, traditionally the busiest time of the year for retailers outside of the December holidays.

The cutback in spending was underscored by the anecdotal reports in the Fed’s “beige book,” a regular survey of businesses around the country. The report found that spending decreased in all 12 metropolitan districts included in the report, and businesses that responded to the Fed complained they “had become more pessimistic about the economic outlook.”

“Normally the beige book has a lot of, ‘On the one hand, on the other hand,’ ” said Ethan Harris, an economist at Barclays Capital. “But all 12 districts weakened. That’s a recession sentence, without using the word.”

Auto dealers and manufacturers were hit hardest, as motor vehicle sales plummeted and orders tapered off at industrial companies. The real estate market remained stagnant and credit was tight. Discount and dollar stores reported more buyers, but sales fell 1.5 percent at department stores.

The slower sales are, in part, a result of the evaporation of common sources of consumer credit, which fueled the growth in consumption in the last decade. That flood of credit now has slowed to a trickle. “You’re beginning to see the deterioration of credit cards, consumer debt, home equity lines,” said Stephen Wood, a strategist at Russell Investments.

And a precipitous decline in consumer spending — the primary engine of economic growth for the last decade — could have dire consequences for the labor market, workers’ salaries and American industry.

“There can be no doubt now that the economy is in recession,” Ian Shepherdson of High Frequency Economics wrote in a note. “It will be there awhile.”

The bleak numbers could also spur further interest rate cuts from the Fed, which meets again at the end of the month. Mr. Bernanke, in his speech in New York, underscored the bleak outlook suggested by Wednesday’s reports, warning that the economy would face an extended period of difficulty.

Businesses may also be unnerved by signs that the global economy is slowing. Over the last year, as the American economy stumbled, domestic businesses became heavily dependent on foreign sales to prop up their bottom line. A downturn in Europe, coupled with a stronger dollar, could cut off that crucial source of revenue. Even Mr. Bernanke cautioned that export sales would slow.

Mr. Harris, of Barclays, said: “Trade has been one of the crutches of the economy in the last year. And it’s clearly weakening.”

The retail sales report, released by the Commerce Department, showed that automobile sales fell about 4 percent last month. A broad range of products sat unsold in stores as well, including furniture, electronics and clothing, suggesting that Americans were delaying big purchases.

“There is almost nothing positive to say about these figures,” Rob Carnell, an economist at ING Bank, wrote in a note.

Even a sharp drop in gasoline prices did not lure Americans back to the mall. A measure of inflation at the producer level, the Producer Price Index, fell 0.4 percent in September on the back of cheaper oil.

Prices for many other products stayed high; outside of energy products, businesses and wholesalers paid 0.4 percent more for finished goods in September than in August, according to the Labor Department.

In the last year, producer prices are up 8.7 percent; “core” prices, which exclude gasoline and food, rose 4 percent in the last year.

Still, economists suggested that as the economy slowed and oil got cheaper, inflation would be less of a worry. “You’ve got all the ingredients for a big drop in inflation going forward,” Mr. Harris said.

A measure of conditions in the manufacturing industry, released by the Federal Reserve Bank of New York on Wednesday, plunged to the lowest level since the survey began in 2001. The Empire State survey dropped to minus 24.6 points as demand for factory orders plummeted in October. The reading was at minus 7.4 in September.

As Consumers Keep Wallets Shut, Economic Outlook Dims, NYT, 16.10.2008,
http://www.nytimes.com/2008/10/16/business/economy/16data.html

Thriftiness on Special in Aisle 5

October 14, 2008
The New York Times
By STEPHANIE ROSENBLOOM and ANDREW MARTIN

Home economics, that lost art in which generations of students learned to keep a household going on a tight budget, is making a comeback. Only this time, lessons in pinching pennies are being taught not in the nation’s classrooms but in its stores.

While it might seem counterintuitive for stores to teach shoppers to cut their spending, several chains have concluded that providing such knowledge can spur loyalty and keep customers from trading down to cheaper competitors.

So the Stop & Shop grocery chain is offering “affordable food summits” where consumers are taught how to lower their grocery bills. Home Depot offers classes on how to cut energy bills. And Wal-Mart Stores hired a “family financial expert” who has used online chats to teach several thousand shoppers how to save money for college, whittle away debt and sell a house.

As the stores see it, they are filling a vacuum. Once upon a time, schools taught survival skills like how to feed a growing family cheaply and run a household on a tight budget. But in an era of prosperity, easy credit and changing social norms, many of those classes were revised to focus on more up-to-date topics.

“There’s an entire generation that’s never really had to know how to stretch the value of a dollar,” said Ellie Kay, who doles out financial advice for Wal-Mart.

Indeed, it has been a quarter-century since the nation suffered a severe recession. During the boom years, few people seemed interested in shopping on a shoestring. Even working-class families dined at restaurants. Many ordinary grocery stores inched their way upscale, aspiring to emulate places like Whole Foods Market and Dean & DeLuca.

Now, with the economy on the decline, families are being squeezed, prompting a return to basics. People are flocking to wholesale clubs and discount stores, trading down to cheaper products, buying store-brand items and making fewer shopping trips.

Some 71 percent of consumers are cooking at home more often and eating less often at restaurants, according to figures from the Food Marketing Institute, which conducted an online survey of more than 2,000 shoppers. The institute also found that 67 percent of consumers were buying fewer luxury foods and 58 percent were eating more leftovers.

As Ms. Kay put it: “Saving money is the new black.”

Unapologetically, retailers are tailoring their money-saving classes to women, saying they base their decision on surveys showing that women control the food budget in most families.

“We have to be interested in what moms are interested in,” said Stephen Quinn, executive vice president and chief marketing officer for Wal-Mart, which recently introduced a television advertising campaign centered on mothers sharing savings advice.

Grocery chains see their role as teaching consumers how to whip up low-cost meals. The stores have long offered recipes and shopping tips, of course, but nowadays they are adopting a relentless focus on value.

On its Web site, Hy-Vee, a supermarket chain in the Midwest, offers ways to feed a family of four for $8 or less. To make pork chop dinner, Hy-Vee recommends four pork chops, one package of apple sauce, some frozen vegetables and “Hy-Vee 5 cheese Texas toast.” Total cost: less than $2 a person.

Stop & Shop has been holding food conferences in New York, New Jersey, Massachusetts and Rhode Island.

Economists, educators and food bank executives are offering advice about surfing the Internet for coupons, sticking to a shopping list, cooking larger portions and freezing leftovers, unplugging appliances when they are not in use and driving more slowly to conserve gas.

“We’re educating people,” said Jim Dwyer, executive vice president of strategy and business development for Stop & Shop. “Even in a tough economic time, there’s an opportunity to still put the right food in front of your family.”

The retailers say their advice is neutral, not specific to any store — but they are always careful to point out money-saving items that their stores carry. The idea is to earn the gratitude of customers and ensure that when they do spend money, some of it will be with the store that sponsored the class.

Many grocery chains are nearly as in the dark as their customers about how to operate in a down economy. Unlike in past downturns, traditional grocers face new competitors that are peeling off some of their customers: dollar stores, huge discount retailers and drugstores that are adding grocery items.

“They are facing a different set of competitive and consumer dynamics,” said Willard Bishop, who runs a supermarket consulting firm that bears his name. “So what they are trying to do is provide value and get credit for the value they are providing.”

Neil Z. Stern, a retail consultant at McMillanDoolittle in Chicago, said smarter grocery stores were finally telling consumers how much cheaper it was to buy groceries than to eat at restaurants. Consumers need to be reminded that $150 in groceries may represent six or seven meals, he said.

“‘You mean I can put chicken cacciatore and potatoes on the table for $3.50 a person? Well, that’s cheaper,’” he said. “Things like that are implicit in going to a supermarket, but it’s never been explicit.”

Thriftiness on Special in Aisle 5, NYT, 14.10.2008,
http://www.nytimes.com/2008/10/14/business/14homeec.html

Across the Country,

Fear About Savings,

the Job Market and Retirement

October 12, 2008
The New York Times
By LAURA M. HOLSON

A year ago, Robert Paynter was comfortably retired and looking forward to years of refurbishing old cars and boating from his dock on Lake Norman in North Carolina. Over a 17-year career at Wachovia, he amassed a pile of stock and options from the bank that he had assumed would be worth more than $600,000.

But now the options are worthless, and he watched the value of his Wachovia shares shrink to about $15,000 before he sold all of them this week after the bank succumbed to the financial crisis and its stock fell to fire-sale prices. The rest of his investments are in free fall.

“It’s like having an out-of-body experience,” said Mr. Paynter, 61. “It’s like being in a hospital bed and watching yourself dying. Whatever the bottom is going to be, I wish it would just get there. It’s the every day, watching the blood drain out of it, that’s hard to take.”

To be sure, he has enough savings to not worry about missing any meals. But Mr. Paynter is resetting his plans for retirement, and has already canceled a trip with friends to Europe next year. “Today I’m O.K.,” he said. “But a year ago I felt like I was in great shape.”

Across the country, Americans are tallying their many losses from the relentless rout in the markets. Financial message boards on the Internet are filled with confessions of fear — about hits to savings, job security and scuttled retirement plans.

“My plan was to never work again,” wrote one person who posted a comment on Bogleheads.org, a Web site for investors who follow the long-term investing advice of John Bogle, founder of the Vanguard funds. “But somebody called me yesterday to see if I was interested in a job, and I am thinking maybe I will go back to work.”

It is not just the declines in savings that people are feeling, reflected in the shrinking balances on quarterly banking statements now arriving in mailboxes.

Based on interviews around the country last week as the market continued its steep slide, many people say they are sensing losses beyond the short-term hits to their portfolios. Some feel a loss of faith in the United States and its government. Others are lowering their sights for the kinds of lives they expect to lead in coming years.

“Maybe we have to readjust our expectations,” said Nicholas Gaffney, a partner in a San Francisco public relations firm. “No one is entitled to anything.”

Mr. Gaffney describes himself as a buy-and-hold investor, and he has been sensing good opportunities of late. He has plowed more than $10,000 into his funds. The value of his portfolio, now at several hundred thousand dollars, has dropped more than a quarter.

He confesses he has been fighting with himself over how closely he should follow the market’s gyrations. One day, he checked the market on his Treo cellphone about 200 times. “I thought to myself, ‘What am I doing?’ ” he said. “I had to stop because I was driving myself crazy. I think everything is going to be fine if people don’t panic.”

That is wishful thinking at this point. Investors have withdrawn more than $81 billion from stock mutual funds since the beginning of the year, with nearly 40 percent of that coming in the last six weeks, according to AMG Data Services, an industry research firm.

Not everyone is panicking, of course. Some are able to see the big picture or find ways to distance themselves from the crush of news about the market.

“Maybe a shrink would have a field day with me,” said Beth Sparks, 40, a self-employed lawyer in Colorado Springs. “But I have an ability to not think about it.”

A week ago, Ms. Sparks reviewed her investments for the first time since January. All are down roughly 30 percent. But Ms. Sparks said she was not concerned because she and her husband did not have a lot of debt. When her husband inherited $50,000 last year, they used it to pay off their mortgage. Vacations typically mean drives to Arizona to spend time with her parents. “I’m just happy me and my family are healthy,” she said.

Peter Schade, 49, who runs his own ad design firm in Farmington Hills, Mich., said each day of bad news was a blow to the idea that he would ever be able to retire.

“I’ve kind of resigned myself to the fact that I’m going to be working for the rest of my life,” he said.

For the last few weeks, Mr. Schade said, he has been closely monitoring the news on the CNN satellite radio network in his car. “I just feel numb,” he said. “The news is changing every half hour.”

Mr. Schade said he and others in the Detroit area were accustomed to weathering downturns in the economy.

“It doesn’t make it any easier, but we’ve sort of fortified ourselves,” he said. In many ways, he said, the rest of the county is just now starting to feel what Detroit has been going through for years, giving people here a head start in coping. “Detroit was the canary in the mine for this. We started this at least three years ago.”

Tom Drooger, 56, of Grand Haven, Mich., is president of a chapter of BetterInvesting, an investment club affiliated with the National Association of Investors Corporation.

Usually, Mr. Drooger is the type to study stocks closely and track the market’s movement throughout the day. By Friday, he was no longer even paying attention. He has decided to stop watching the market news on CNBC for now and instead puts on easy-listening music.

“There’s nothing you can do about it after a while,” he said.

He compared the financial crisis to a house on fire and said he was merely waiting until the flames die down.

“Once the fire’s out, you go in and do the repairs,” he explained. “To start to try to move things around until the market wrings itself out is pointless. I’m just sitting on the sidelines, leaving everything where it’s at.”

College students are watching from the sidelines, too, since they typically are more concerned about jobs at this stage of their lives than the nest eggs.

Matthew Ehrlich, 23, a second-year law student at Wayne State University in Detroit, is worried about whether the economy will improve before he graduates in 2010.

“If things don’t get better in the next two years, I’m going to have a real tough time,” he said. “My hope is that I can just ride it out until the financial markets get back on track.”

Mr. Ehrlich is still debating what type of law to specialize in and said this crisis might ultimately influence his decision.

“The way things are going, bankruptcy law seems to be pretty hot,” he said.

Beyond the personal toll to their savings, some people said they were concerned about what the financial crisis said about the United States.

“All I can tell you is it is a lack of faith in America,” said Pat Emard, 65, of Aptos, Calif., who now worries she may have to go back to work. “People have lost faith in our government. I don’t know what happens now.”

That sense of uncertainty is also troubling to Renee Snow, 73, a retired teacher who taught in the Chicago public schools for 38 years.

Born during the Depression, Ms. Snow said it was in her DNA to save, save, save. Over her career as a teacher, she did just that, and Ms. Snow, now a widow, lives off her teachers’ pension and income from her tax-exempt savings plan. She says she has always put her money in insured products when she could.

“I never watch the stock market, and now I’m watching it every day,” she said.

She has money socked away in savings accounts in different banks but recently began researching whether her banks were solid.

The economy is a frequent topic of conversation among friends at the Jane Addams Senior Caucus, an organization in Chicago where she volunteers as a board member.

Over the last couple of weeks, a general malaise has taken over, Ms. Snow said. “It’s very hard to have much faith in what the government is doing when they change it every day,” she said. “As you read more and more about how we got into this situation, you have less and less faith of how we’re going to get out of it.”

She has an ominous feeling about the future, she said. “You don’t go through life thinking the bank I do business with could go belly up tomorrow,” she said. “This is a new feeling people are living with.”

Nick Bunkley and Crystal Yednak contributed reporting.

    Across the Country, Fear About Savings, the Job Market and Retirement,
    NYT, 12.10.2008,
    http://www.nytimes.com/2008/10/12/business/economy/12voices.html

Full of Doubts,

U.S. Shoppers Cut Spending

October 6, 2008
The New York Times
By LOUIS UCHITELLE, ANDREW MARTIN
and STEPHANIE ROSENBLOOM

Cowed by the financial crisis, American consumers are pulling back on their spending, all but guaranteeing that the economic situation will get worse before it gets better.

In response to the falling value of their homes and high gasoline prices, Americans have become more frugal all year. But in recent weeks, as the financial crisis reverberated from Wall Street to Washington, consumers appear to have cut back sharply. Even with the government beginning a giant bailout of the financial system, their confidence may have been too shaken for them to resume their free-spending ways any time soon.

Recent figures from companies, and interviews across the country, show that automobile sales are plummeting, airline traffic is dropping, restaurant chains are struggling to fill tables, customers are sparse in stores.

When the final tally is in, consumer spending for the quarter just ended will almost certainly shrink, the first quarterly decline in nearly two decades. Many economists, who began the third quarter expecting modest growth, now believe the cutbacks are so severe that the overall economy did not expand either, and they warn that a consumer-led recession could be more severe than the relatively mild one earlier this decade.

“The last few days have devastated the American consumer,” said Walter Loeb, president of Loeb Associates, a consultancy, who said he worried that the constant drumbeat of negative news about the economy was becoming a self-fulfilling prophecy. “They all feel poor.”

For some Americans, the pain is already acute: jobs disappeared at a faster clip in September. For many others, day-to-day finances are fine for now, but the financial outlook is uncertain: 401(k) accounts are dwindling, loans are hard to get and house prices continue to fall.

Claudia Prindiville, a 41-year-old mother of three, is among those feeling anxious. Shopping at a Talbots store in Chicago’s northwest suburbs, she said her own family’s finances had not yet suffered. Still, she pulled out a coupon to buy a two-piece sweatsuit, and at The Children’s Place she bought pants and shirts from the sale rack.

“All the talk about how bad it is out there has started getting in my head,” she said. “I still need to shop for my kids’ school clothes, but I am definitely buying less for myself.”

Consumer spending, which accounts for nearly two-thirds of the economy, grew modestly earlier in the year but fell in July and August on an annualized rate. When the government releases quarterly numbers this month, they are expected to show that consumer spending shrank 3 percent or more. That would be the first quarterly decline since 1990, ahead of the 1991 recession, and the steepest since 1981.

According to interviews with shoppers, analysts and company executives, the impact of the financial news of the last two weeks has been palpable in many corners of the country, from car dealerships, which endured the worst month for sales in 15 years, to the flashy casinos of Las Vegas, where spending at luxury restaurants and stores and at gambling tables has gone from bad to worse.

“In the last few days, there has been a huge drop-off in foot traffic and almost zero sales,” said Gil Colon, sales manager at Villa Reale, a high-end art and furniture store in Las Vegas, who has laid off five sales people in the last five months, leaving three.

“People have lost their confidence. They have no buying power. They are losing their retirements, their vacation funds, and they are scared to commit to buying anything,” he said.

The picture is just as grim at suburban malls and city boutiques, where traffic is disappearing as retailers brace for what many predict will be a dismal holiday shopping season. Some have responded by reducing the number of sales people or their hours.

Taking a break outside an Office Depot store in suburban Chicago, Dave Cargerman, a 25-year-old sales clerk, said his hours had been cut back. “We got killed during the back-to-school sales,” Mr. Cargerman said. “And that time of year is usually our bread and butter.”

Nearby, employees at Lattof Chevrolet were preparing to close the doors this month on a business that opened in 1936. It may not be the last dealership to go: the percentage of people saying they expect to buy a car in the next six months, on a three-month moving average, has fallen to 5 percent, the lowest figure since the Conference Board started asking about such plans in its consumer confidence survey, in 1967.

“We’re not selling S.U.V.’s and trucks at all,” said Raul Trejo, 24, a mechanic. “We saw it coming.”

The situation is so uncertain that some retailers are simply not even trying to estimate their sales. Pier 1 Imports and Circuit City stores recently withdrew their guidance to Wall Street about earnings and said they would not offer any more predictions this year.

At a retail conference in New York on Thursday, Michael W. Rayden, chairman and chief executive of Tween Brands, which owns the Limited Too and Justice chains, spoke about consumer fears. “As I travel around the country and listen to moms and little girls, it is amazing how much even these 10-year-old girls are aware that something is going on,” he said. “Mom is saying, ‘I can’t afford that.’ ”

Even Apple, maker of the iPhone, is not immune as concerns mount about consumer electronics. The stock of Apple ended the week down 19 percent after two stock analysts suggested that the rapid cooldown in consumer spending would put an end to the company’s hot sales streak.

Casual dining restaurants, which have struggled in recent years because of a glut of restaurants and higher-quality fare at fast-food chains, have taken a beating already this year, forcing the Bennigan’s chain to close and leaving several others struggling. “I think September could be the worst month of the year, and we’ve had a lot of bad months,” said Lynne Collier, an analyst at KeyBanc Capital Markets who covers the restaurant industry.

At a Chili’s Grill & Bar in the Arlington Heights suburb of Chicago, Nichol Bedsole, a 23-year-old salon manager, said she used to eat at places like Chili’s at least once a week but no longer does.

“Now it’s more like twice a month, and it’s somewhere cheap, like Subway,” she said. “I have a lot of bills to pay.”

Consumers are cutting back on air travel, whether for business or pleasure. Passenger volume is dwindling even faster than airlines can sideline planes and cut poorly performing routes. At American Airlines, domestic passengers flew 11.7 percent fewer miles in September, while the airline cut 9.4 percent of domestic seats.

The consumer slowdown in recent weeks comes after spending drops in July and August, when tax rebates came to an end. The financial shocks on Wall Street accelerated the decline, along with limits on consumer credit imposed by some banks.

“Consumers have become quite concerned that the recession, which they think is already under way, will last longer than they anticipated and will be deeper,” said Richard Curtin, director of the Reuters-University of Michigan Surveys of Consumers, describing the most recent poll. “They see their worst fears coming true.”

In addition, household net worth, which greases spending, fell $6 trillion over the last year, with $1 trillion of that in just the last four weeks, said Mark Zandi, chief economist at Moody’s Economy.com.

Less than a month ago, Nigel Gault, chief domestic economist at Global Insight, a forecasting service, predicted that domestic economic output would rise 1.2 percent in the third quarter. “At the moment I’m running close to zero,” he said, “and maybe a negative.”

Of course, the economic malaise has not yet hurt all businesses. It has even been good for some.

Entertainment and media executives remain optimistic about sales of movie tickets, DVDs and games. At Nintendo of America, the popular Wii video game consoles are still selling briskly at about $300.

“My view is that when consumers get concerned about their nest egg, or their country, they need entertainment,” said Bo Andersen, president and chief executive of the Entertainment Merchants Association, which represents distributors and retailers of home entertainment products.

And as fewer people eat at restaurants, food is flying off the shelves at grocery stores. David Driscoll, a stock analyst for Citigroup, said the shares of big food companies have risen about 17 percent this year. By contrast, he said, the restaurant sector is down 4 percent.

“The alternative of restaurants is buying groceries and eating at home,” he said, “and right now, that’s an attractive alternative.”

Daniel Kimble, 31, was putting Mr. Driscoll’s theory into practice on Friday. An independent trucker from Oklahoma, he stopped his rig outside a Wal-Mart in Cleveland on his way to a nearby factory.

Mr. Kimble ticked off a long list of his money-saving steps, from driving his pickup truck less to using less laundry detergent to buying fewer clothes. And he has stopped eating at restaurants on the road, which is why he was parked at Wal-Mart.

“I’m going in to buy some lunch meat and some bread, whatever’s cheap,” he said. “I’ve got to save money, you know?”

Tim Arango, Karen Ann Cullotta, Laurie J. Flynn, Clifford Krauss,

Christopher Maag, John Markoff, Joe Sharkey

and Bill Vlasic contributed reporting.

Full of Doubts, U.S. Shoppers Cut Spending, NYT, 6.10.2008,
http://www.nytimes.com/2008/10/06/business/06econ.html

Fearful consumers

stop spending in August

Mon Sep 29, 2008
12:08pm EDT
Reuters
By Glenn Somerville

WASHINGTON (Reuters) - Consumers facing rising unemployment kept their spending unchanged in August even though incomes rose, according to a government report Monday that showed optimism about the economy's direction was fading.

The Commerce Department said consumer spending was flat in August after barely edging up by a revised 0.1 percent in July, a much weaker outcome than forecast by Wall Street economists surveyed by Reuters who had a 0.2 percent spending rise.

Incomes from wages and salaries and all other sources rose by 0.5 percent in August, largely reversing July's revised 0.6 percent drop and well ahead of forecasts for a smaller 0.2 percent gain.

Incomes were boosted early this year by payments made under an economic stimulus program but that has largely worn off.

"Consumers seem to have hit the foxholes," said Joel Naroff, president of Naroff Economic Advisors Inc. in Holland, Pennsylvania, adding that he hoped a proposed $700-billion bailout package that Congress is voting on for U.S. financial firms may relieve some uncertainty about the future.

Consumer spending on goods and services fuels about two-thirds of U.S. economic activity so the economy is widely predicted to slow in coming quarters. In the second-quarter report on gross domestic product issued last Friday, consumer spending already was revised down to a 1.2 percent annual rate from 1.7 percent and is likely to keep losing momentum.

"It looks like we are poised to see a real-term decline in personal consumption and that will likely result in a negative GDP number in the third quarter," cautioned James O'Sullivan, economist at UBS Securities in Stamford, Connecticut.

Separately, the Dallas Federal Reserve Bank said its index of manufacturing activity weakened sharply in September, falling to -39.6 from -18.8 in August though some of the drop likely stemmed from Hurricane Ike causing temporary factory closings.

The income and spending data had no impact on financial markets, which still were grappling with news of another U.S. bank merger and with details of the huge taxpayer-financed bailout program for U.S. financial firms. The Dow Jones Industrial Average and the Nasdaq composite index both were sharply lower at midday.

Despite higher August incomes, consumers facing higher prices for gasoline and other items were unable to save more. The personal savings rate dropped to 1 percent from 1.9 percent in July.

Meanwhile, the report pointed to persistent inflation pressures. The personal consumption expenditures index on a year-over-year basis rose 4.5 percent in August, only barely below the 4.6 percent rise posted in July. Core prices that exclude food and energy were up 2.6 percent -- the highest rate since the beginning of 1995.

Core PCE was up 0.2 percent from July, in line with expectations.

(Additional reporting by Richard Leong in New York, Editing by Andrea Ricci)

Fearful consumers stop spending in August, R, 29.9.2008,
http://www.reuters.com/article/topNews/idUSTRE48S3CB20080929

Economic View

Three Strikes Against Consumers

August 3, 2008
The New York Times
By PETER L. BERNSTEIN

ONE of the spookiest features of the current economic crisis is the way everything seemed to go wrong at the same time. In 2007, as if some kind of secret signal went out among them, housing prices accelerated their decline while the prices of oil and food rocketed higher. These changes were abrupt, as they slammed into the economy with little forewarning of even bigger price shocks just ahead.

The pain from any one of these price increases would have been bad enough. But experiencing all three simultaneously doomed the business expansion under way since the end of 2001. That the housing crisis also served to ignite the calamities in the world of credit made the problems only harder to overcome.

The numbers are striking. From May 2007 to May 2008, the price of food jumped by 5.1 percent, double the annual rate from 1991 to 2006. Home prices show a similar disconnect. During the two years ended in December 2006, home prices jumped 43 percent. But in 2007, home prices fell 10 percent, and the pace of decline has accelerated this year. In the case of oil, the price at the end of 2006, at $62 a barrel, was only $3 more than it was a year earlier. Over the course of 2007, however, oil zoomed to $92 from $62; by mid-2008, it was up an additional $40.

These extraordinary shifts in tempo were, for the most part, unanticipated. Yes, the explanation for the explosion in food and oil prices — global demand exceeding the growth in global supplies — was apparent in the three or four years that preceded this crisis. Yet why were there no price shocks then?

At least the moves in oil and food prices share a common explanation, but what in the world do they have to do with the end of the boom in home prices? One could contend that increases in gasoline prices caused the demand for homes to weaken, but the argument is not very compelling, and I do not recall a single mention of that possibility during 2007.

In fact, the timing among these price movements seems a weird coincidence, not a development linked by cause and effect. And this suggests the most unusual feature of our current problems: the primary impact of all of them has been on consumers, not on businesses. Even the credit crisis centers on the home mortgage problem — though the jolly time investors had in risk-taking en route to the edge of this abyss made a significant contribution to the distress in the banking system and other financial markets.

This combination of events explains why it is so hard to find solutions that can bring the economy back into the light. Past recessions and economic crises typically developed in the business sector, where companies have a habit during good times of running to excess in inventory accumulation or in expanding employment and capacity. This time, businesses generally have been well financed and conservative in their decision-making. Even the stock market, although at high levels in 2007, has not been in the kind of speculative fever that has led to past crashes.

As a result of these exceptional conditions, we have no guidelines to follow. We are in uncharted territory.

Most of the attention has focused on the cracks and groans from the financial sector, as banks totter at the edge of failure and where credit has been so hard to come by. Some banks are even uneasy about lending to one another — an astonishing rupture of normal conditions.

Nevertheless, the therapy must focus on the household sector, wrestling with the triple blows of high home prices, oil prices and food prices. Nothing will turn the economy around until we can restore some sense of hope and security among consumers — perhaps even as food and oil remain painfully expensive.

Today, a halt in the decline of home prices seems the necessary condition to transform the system from despair to hope and to turn the financial sector, now embattled and disorganized, back into the functioning organism the economy needs so badly. Indeed, here is where economic policy can have some influence on the outcome. (In the case of food and oil, the forces are too strong for government to intervene with any success.)

These steps would involve more effort by Washington — including financial incentives —to persuade mortgage lenders to be patient about repayments instead of foreclosing and making matters worse. After all, every participant in the mortgage business will breathe more easily when the decline in home prices comes to an end.

ASSISTANCE to individuals and institutions in trouble always raises concerns about the moral hazards of bailouts, especially when a case can be made that people underrated risks or were blindsided in their decision-making. But we have no choice here. The economy teeters on the edge of not just a recession, but also a more profound decline where trouble in any single sector can spread breakdowns throughout the system, driving unemployment to intolerable levels. To sit back and let nature take its course is to risk the end of a civil society.

Until we move more decisively in this direction, other efforts are likely to be frustrating at best and counterproductive at worst. The household is the key to the puzzle.

Peter L. Bernstein, a financial consultant and economic historian,

is the editor of the Economics & Portfolio Strategy newsletter.

Three Strikes Against Consumers, NYT, 3.8.2008,
http://www.nytimes.com/2008/08/03/business/03view.html

Confidence Falls to New Low

April 11, 2008
Filed at 3:20 a.m. ET
By THE ASSOCIATED PRESS
The New York Times

WASHINGTON (AP) -- Americans' confidence in the economy fell to a new low, dragged down by worries about mounting job losses, record-high home foreclosures and zooming energy prices.

According to the RBC Cash Index, confidence dropped to a mark of 29.5 in April, down from 33.1 in March. The new reading was the worst since the index began in 2002. It marked the fourth month in a row where confidence has fallen to an all-time low.

''Consumers are very pessimistic,'' said Mark Vitner, economist at Wachovia. ''There are not a lot of happy campers out there.''

Over the past year, consumer confidence has deteriorated significantly. Worsening problems in housing, harder-to-get credit, financial turmoil on Wall Street and lofty energy prices have put people in a much more gloomy mind-set. Last April, confidence stood at 85.4. The index is based on results from the international polling firm Ipsos.

All the economy's problems are taking a toll on President Bush's approval ratings, too. The public's approval rating on his economic stewardship fell to a low of 27 percent, according to a separate Associated Press-Ipsos poll. Bush's overall job-approval rating dipped to 28 percent, also an all-time low, the poll said.

Many economists believe the country has tipped into its first recession since 2001. Federal Reserve Chairman Ben Bernanke for the first time acknowledged last week that a recession was possible. It was a rare public utterance of the ''r'' word by a Fed chief.

''Consumer sentiment is tracking at levels we think are consistent with a mild recession at this point,'' said Brian Bethune, economist at Global Insight.

A measure looking at consumer's feelings about current economic conditions slipped to a 54.6 in April, from 54.7 in March. The new reading was the lowest in six years of records.

Rising unemployment and job losses are making people more uneasy.

The government reported last week, that employers slashed 80,000 jobs in March, the most in five years and the third straight month where the nation's payrolls were cut. The unemployment rate jumped from 4.8 percent to 5.1 percent, the highest since the aftermath of the devastating Gulf Coast hurricanes.

Another factor blamed for eroding consumer confidence is high gasoline prices, which are socking people's wallets and pocketbooks. That's squeezing already strained budgets and leaving people with less money to spend on other things.

''Much of the angst we're seeing from consumers is `Gosh, I'm working harder and harder, and all I'm doing is paying for my basic necessities. I don't have anything left to have any fun,''' Vitner said.

Gasoline prices, which have set a string of records in recent weeks, climbed to a new record of $3.357 a gallon on Thursday, according to AAA and the Oil Price Information Service.

Anxiety also has grown as people wonder if there is any relief in sight for the troubled housing market. With the housing collapse, many people have watched their single-biggest asset -- their home -- drop in value. That has made them feel less wealthy and less inclined to spend.

Against the backdrop of all these concerns, another measure tracking individuals' sentiments about the economy and their own financial standing over the next six months fell deeper into negative territory. This gauge dropped to a negative 48.3 in April, down from a negative 41.6 in March. The new reading was the worst on record.

A measure on consumers feelings about employment conditions fell to 97 in April, from 99.2 in March. The new reading was the lowest since early October 2003. Another gauge of attitudes about investing, including comfort in making major purchases, declined to 56.4 in April, from 56.7 in March. The new figure was the lowest on records going back to 2002.

Economists keep close tabs on confidence barometers for clues about consumer spending, a major shaper of overall economic activity.

Cautious shoppers gave most retailers their most dismal March in 13 years, according to sales figures reported by major retailers on Thursday. J.C. Penney Co., Gap Inc., and Limited Brands Inc. were among the merchants hit by a sharp drop in sales.

The RBC consumer confidence index was based on the responses from 1,005 adults surveyed Monday through Wednesday about their attitudes on personal finance and the economy. Results of the survey had a margin of sampling error of plus or minus 3 percentage points. The overall confidence index is benchmarked to a reading of 100 in January 2002, when Ipsos started the survey.

Pointing to the overall confidence reading of 29.5 in April, T.J. Marta, a fixed-income strategist at RBC Capital Markets, said: ''What confidence? There is no confidence. It's like 1929.''

Confidence Falls to New Low, NYT, 11.4.2008,
http://www.nytimes.com/aponline/us/AP-Consumer-Confidence.html

Consumer Attitudes and Home Prices Sour

March 26, 2008
The New York Times
By MICHAEL M. GRYNBAUM

Americans are bracing for rising unemployment and shrinking salaries, a gloomy outlook that could translate into a serious cutback in consumer spending, the primary engine of the economy.

A private survey of about 2,500 households found that Americans feel worse now about the economy’s prospects than at any time since 1973, when Americans struggled with soaring oil prices and runaway inflation.

Fears often prove overblown, of course, and this particular survey, which was released on Tuesday by the Conference Board, has a spotty track record as an indicator. But expectations can often be self-fulfilling: worried consumers are less likely to make the big purchases that help keep the economy humming.

“It signals a great deal of concern and anxiety and uncertainty among consumers,” Bernard Baumohl of the Economic Outlook Group, a research firm in Princeton, N.J., said of the survey.

“Add that to the fact that the job market has weakened dramatically, and incomes haven’t been rising very much — certainly below the pace of inflation — and you really have the ingredients of a significant cutback of consumer spending,” he said.

With home prices falling at record rates, Americans are also finding it more difficult to draw on their home equity, further depressing their spending power. A separate report on Tuesday said the value of single-family homes in major metropolitan areas plummeted 10.7 percent in January from a year earlier, the steepest annual decline since the 1990s housing slump.

“Consumer-led recessions are among the most difficult to turn around in an economy,” Mr. Baumohl said. “Particularly this one, because of the fact that many households feel a lot poorer than they did a year ago, primarily because of the collapse in the value of their homes.”

Sales of goods and services make up more than two-thirds of gross domestic product, so a significant spending slowdown can speed the onset of a recession or make a downturn even worse.

And the gloom among consumers appeared widespread. A quarter of those surveyed said that businesses conditions would worsen in the next six months, and nearly a third said the economy would have fewer jobs. Fewer Americans plan to purchase big-ticket items like refrigerators, vehicles and television sets, and more than half said that jobs were currently “not so plentiful.”

Responding to a question about income expectations, the proportion of Americans who said they expected their incomes to rise over the next six months dropped to 14.9 percent, the lowest level since the Conference Board began its survey in 1967.

Still, some economists said the report may represent the worst of the current downturn, rather than a harbinger of more pain to come.

“Typically, these readings look the worst when the economy is bottoming,” said Michael T. Darda, chief economist at MKM Partners, a research and trading firm. He said that on average, the stock market has risen substantially in the six months after Americans’ economic expectations bottom out.

“As bad as this looks — and it is bad — it might mean we are in a recession right now,” Mr. Darda said. “It’s not necessarily a forward-looking indicator.”

Over all, consumer confidence — a measure of current sentiment — stood at a five-year low in March, the Conference Board said. The results echoed a separate consumer survey by the University of Michigan and Reuters, which reached a 16-year low in March.

Home values are also falling at a rapid rate, according to the closely watched Standard & Poor’s Case-Shiller index, which on Tuesday released its latest survey of home prices in 20 metropolitan areas.

In January, all 20 regions recorded price declines, with the steepest losses in Las Vegas, Phoenix, and Los Angeles. Over all, prices dipped 2.36 percent in January, after falling 2.1 percent a month before.

Homes in Miami and Las Vegas have lost nearly 20 percent of their value in the 12 months ended in January. In only one area, Charlotte, N.C., have prices risen over the last year.

Though the price declines will hurt homeowners, they may also help to lure buyers back into the ailing housing market. Economists said the price drop was necessary to bring down inventories, which have ballooned in recent months as buyers waited for prices to fall even further.

“It’s a necessary thing,” Joshua Shapiro, an economist at the research firm MFR, said. “If pain is necessary, bring it on. That’s where we are right now.”

Falling prices may have already started to attract some buyers. Sales of previously owned homes ticked up last month, according to the National Association of Realtors, ending a six-month streak of declines.

The positive sales figure led some analysts to suggest that the housing market is approaching its bottom. But other economists predict that prices will have to fall further, and for several more months, before sales pick up in earnest.

In the New York metropolitan area, home values fell just 0.9 percent in January, and 5.8 percent compared with a year earlier. But the decline appeared to be gaining speed: values are down nearly 10 percent on a three-month annualized basis.

Consumer Attitudes and Home Prices Sour, NYT, 26.3.2008,
http://www.nytimes.com/2008/03/26/business/26econ.html

Inflation Soars as Confidence Plunges

February 26, 2008
Filed at 10:17 a.m. ET
By THE ASSOCIATED PRESS
The New York Times

NEW YORK (AP) -- No good news today on the economic front. Consumer confidence plunged, the wholesale inflation rate soared, the number of homes being foreclosed jumped, home prices fell sharply and a report predicts big increases in health care costs.

Consumer confidence weakened significantly as Americans worry about less-favorable business conditions and job prospects. The New York-based Conference Board says in a report released on Tuesday that its Consumer Confidence Index plunged in February to 75.0 from a revised 87.3 in January.

The reading -- the lowest since the index registered 64.8 in February 2003 -- is far below the 83.0 analysts expected.

The index measures how consumers feel now about the economy. It has been weakening since July, suggesting that wary consumers may retrench financially, which could fatigue the economy further.

Inflation at the wholesale level soared in January, pushed higher by rising costs for food, energy and medicine. The monthly increase carried the annual inflation rate to its fastest jump in a quarter century.

The Labor Department said Tuesday that wholesale prices rose 1 percent last month, more than double the 0.4 percent increase that economists had been expecting.

The January surge left wholesale prices rising by 7.5 percent over the past 12 months, the fastest pace in more than 26 years, since prices had risen at a 7.5 percent pace in the 12 months ending in October 1981.

The number of homes facing foreclosure jumped 57 percent in January compared to a year ago, with lenders increasingly forced to take possession of homes they couldn't unload at auctions, a mortgage research firm said Monday.

Nationwide, some 233,001 homes received at least one notice from lenders last month related to overdue payments, compared with 148,425 a year earlier, according to Irvine, Calif.-based RealtyTrac Inc. Nearly half of the total involved first-time default notices.

The worsening situation came despite ongoing efforts by lenders to help borrowers manage their payments by modifying loan terms, working out long-term repayment plans and other actions

U.S. home prices lost 8.9 percent in the final quarter of 2007, Standard & Poor's said Tuesday, marking a full year of declining values and the steepest drop in the 20-year history of its housing index.

''We reached a somber year-end for the housing market in 2007,'' said one of the index's creators Robert Shiller. ''Home prices across the nation and in most metro areas are significantly lower than where they were a year ago. Wherever you look things look bleak.''

The S&P/Case-Shiller home price indices, which include a quarterly index, a 20-city index and a 10-city index, reflect year-over-year declines in 17 metropolitan areas with double-digit declines in eight of them.

By 2017, total health care spending will double to more than $4 trillion a year, accounting for one of every $5 the nation spends, the federal government projects.

The 6.7 percent annual increase in spending -- nearly three times the rate of inflation-- will be largely driven by higher prices and an increased demand for care, the Centers for Medicare and Medicaid Services said Monday. Other factors in the mix include a growing and aging population. The first wave of baby boomers become eligible for Medicare beginning in 2011.

With the aging population, the federal government will be picking up the tab for a growing share of the nation's medical expenses. Overall, federal and state governments accounted for about 46 percent of health expenditures in 2006. That percentage will increase to 49 percent over the next decade.

Inflation Soars as Confidence Plunges, NYT, 26.2.2008,
http://www.nytimes.com/aponline/business/AP-Economy-Rdp.html

Letters

Being Poor in a ‘Charge It’ Society

February 17, 2008
The New York Times

To the Editor:

“You Are What You Spend,” by W. Michael Cox and Richard Alm (Op-Ed, Feb. 10), argues that growing income disparities in this country don’t mean very much. Consumption offers a better “measurement of financial well-being,” the writers say, and it “indicates that the gap between rich and poor is far less than most assume.”

Equating consumer spending with well-being, however, ignores elements of long-term well-being like investing for retirement, saving for college education, or building wealth through home ownership.

Over the long term, you cannot spend more than you earn, unless the assets you own have appreciated. The rich have more assets, and they have appreciated in recent decades. The poor do not; they have more debt, and have been harder hit by the subprime crisis.

It’s still not easy living on a low income in this country, and the disparities between rich and poor are significant and increasing.

Michael Kiparsky
Eric Hallstein
Berkeley, Calif., Feb. 10, 2008

•

To the Editor:

What a disappointment it was to read two members of our economic elite telling us: Don’t worry. Be happy. The poor are like us, just with less money.

Prosperity is not a color television, a cellphone and a VCR, and for many of us prosperity is not its own end but a means toward well-being.

Well-being is the certainty that you can provide your children with a quality education, which W. Michael Cox and Richard Alm’s chart shows many can’t purchase. Well-being is the security of having a good roof over your head in a safe, clean neighborhood. And it is knowing that if your children become ill, you have the income to help them pull through.

I am so tired of our economists (and often, our newspapers) saying that the good life and the good society are defined by consumption (or its flip side, G.D.P.) and that the path to happiness is simply more of it.

Keith M. Wilson
Charleston, Ill., Feb. 10, 2008

•

To the Editor:

W. Michael Cox and Richard Alm seems to equate having a lot of stuff — refrigerators, stoves, cellphones, cars, color TVs, DVD players and the like — with a “lifting” of the standard of living.

I disagree. The advantages of an increase in household consumption are far outweighed by the disadvantages. Does owning a car really shorten our workday, giving us more time to read, exercise or sleep?

As for globalization as currently practiced, it has undermined the financial autonomy and social cohesiveness of communities both here and abroad.

And you call this the good life?

Karin J. Lauria
Marlborough, Mass., Feb. 10, 2008

•

To the Editor:

W. Michael Cox and Richard Alm say Americans in the lowest fifth for income are able to spend almost double their income because they have other sources of money — like bank accounts and proceeds from home sales. The major reason that poor Americans are able to outspend their income is that they borrow heavily.

Credit-card, loan and other debt is enormous among those who cannot afford to buy everything our consumerist society convinces them they need (or even what they really need).

This debt burden clearly calls into question the writers’ assertion that “consumption is a better measure of financial health than income.”

Rosalyn Benjamin Darling
Indiana, Pa., Feb. 10, 2008

The writer is a professor of sociology at Indiana University of Pennsylvania.

•

To the Editor:

I agree that United States income inequality is not as problematic as many claim it to be. However, homes form the core of Americans’ assets. Higher-income individuals are more likely to be homeowners. Those making less either rent and give money away every month, or pay high mortgages resulting from modest down payments.

Overall purchasing power matters, but it is also important to analyze the relative burden of a major regular expenditure on a household’s budget. Then it becomes clear that America’s free market turns out to be freer for those who are fortunate to benefit from higher incomes.

Sebastian Wisniewski
Redwood City, Calif., Feb. 11, 2008

•

To the Editor:

Decades of social science research make it clear that spending is not the whole story. Assets and debts also matter a great deal for family well-being and intergenerational mobility. They are the resources families draw on to send children to college, to help with the down payment on a first home, and to make ends meet when times are tough.

Without assets, poor families may be able to get by, but they will have real trouble ever getting ahead. Instead of dismissing inequality, we ought to focus on helping poor families to acquire assets and open up opportunities.

Equality isn’t a DVD player in every household; it’s an equal shot for all American children.

Daniel Schneider
Princeton, N.J., Feb. 11, 2008

Being Poor in a ‘Charge It’ Society, NYT, 17.2.2008,
http://www.nytimes.com/2008/02/17/opinion/l17spend.html

Op-Ed Contributor

Totally Spent

February 13, 2008
By ROBERT B. REICH
The New York Times

Berkeley, Calif.

WE’RE sliding into recession, or worse, and Washington is turning to the normal remedies for economic downturns. But the normal remedies are not likely to work this time, because this isn’t a normal downturn.

The problem lies deeper. It is the culmination of three decades during which American consumers have spent beyond their means. That era is now coming to an end. Consumers have run out of ways to keep the spending binge going.

The only lasting remedy, other than for Americans to accept a lower standard of living and for businesses to adjust to a smaller economy, is to give middle- and lower-income Americans more buying power — and not just temporarily.

Much of the current debate is irrelevant. Even with more tax breaks for business like accelerated depreciation, companies won’t invest in more factories or equipment when demand is dropping for products and services across the board, as it is now. And temporary fixes like a stimulus package that would give households a one-time cash infusion won’t get consumers back to the malls, because consumers know the assistance is temporary. The problems most consumers face are permanent, so they are likely to pocket the extra money instead of spending it.

Another Fed rate cut might unfreeze credit markets and give consumers access to somewhat cheaper loans, but there’s no going back to the easy money of a few years ago. Lenders and borrowers have been badly burned, and the values of houses and other assets are dropping faster than interest rates can be lowered.

The underlying problem has been building for decades. America’s median hourly wage is barely higher than it was 35 years ago, adjusted for inflation. The income of a man in his 30s is now 12 percent below that of a man his age three decades ago. Most of what’s been earned in America since then has gone to the richest 5 percent.

Yet the rich devote a smaller percentage of their earnings to buying things than the rest of us because, after all, they’re rich. They already have most of what they want. Instead of buying, and thus stimulating the American economy, the rich are more likely to invest their earnings wherever around the world they can get the highest return.

The problem has been masked for years as middle- and lower-income Americans found ways to live beyond their paychecks. But now they have run out of ways.

The first way was to send more women into paid work. Most women streamed into the work force in the 1970s less because new professional opportunities opened up to them than because they had to prop up family incomes. The percentage of American working mothers with school-age children has almost doubled since 1970 — to more than 70 percent. But there’s a limit to how many mothers can maintain paying jobs.

So Americans turned to a second way of spending beyond their hourly wages. They worked more hours. The typical American now works more each year than he or she did three decades ago. Americans became veritable workaholics, putting in 350 more hours a year than the average European, more even than the notoriously industrious Japanese.

But there’s also a limit to how many hours Americans can put into work, so Americans turned to a third way of spending beyond their wages. They began to borrow. With housing prices rising briskly through the 1990s and even faster from 2002 to 2006, they turned their homes into piggy banks by refinancing home mortgages and taking out home-equity loans. But this third strategy also had a built-in limit. With the bursting of the housing bubble, the piggy banks are closing.

The binge seems to be over. We’re finally reaping the whirlwind of widening inequality and ever more concentrated wealth.

The only way to keep the economy going over the long run is to increase the wages of the bottom two-thirds of Americans. The answer is not to protect jobs through trade protection. That would only drive up the prices of everything purchased from abroad. Most routine jobs are being automated anyway.

A larger earned-income tax credit, financed by a higher marginal income tax on top earners, is required. The tax credit functions like a reverse income tax. Enlarging it would mean giving workers at the bottom a bigger wage supplement, as well as phasing it out at a higher wage. The current supplement for a worker with two children who earns up to $16,000 a year is about $5,000. That amount declines as earnings increase and is eliminated at about $38,000. It should be increased to, say, $8,000 at the low end and phased out at an income of $46,000.

We also need stronger unions, especially in the local service sector that’s sheltered from global competition. Employees should be able to form a union without the current protracted certification process that gives employers too much opportunity to intimidate or coerce them. Workers should be able to decide whether to form a union with a simple majority vote.

And employers who fire workers for trying to organize should have to pay substantial fines. Right now, the typical penalty is back pay for the worker, plus interest — a slap on the wrist.

Over the longer term, inequality can be reversed only through better schools for children in lower- and moderate-income communities. This will require, at the least, good preschools, fewer students per classroom and better pay for teachers in such schools, in order to attract the teaching talent these students need.

These measures are necessary to give Americans enough buying power to keep the American economy going. They are also needed to overcome widening inequality, and thereby keep America in one piece.

Robert B. Reich, a professor of public policy

at the University of California, Berkeley,

is the author, most recently, of “Supercapitalism.”

Totally Spent, NYT, 13.2.2008,
http://www.nytimes.com/2008/02/13/opinion/13reich.html

Op-Ed Contributors

You Are What You Spend

February 10, 2008
The New York Times
By W. MICHAEL COX and RICHARD ALM

Dallas

WITH markets swinging widely, the Federal Reserve slashing interest rates and the word “recession” on everybody’s lips, renewed attention is being given to the gap between the haves and have-nots in America. Most of this debate, however, is focused on the wrong measurement of financial well-being.

It’s true that the share of national income going to the richest 20 percent of households rose from 43.6 percent in 1975 to 49.6 percent in 2006, the most recent year for which the Bureau of Labor Statistics has complete data. Meanwhile, families in the lowest fifth saw their piece of the pie fall from 4.3 percent to 3.3 percent.

Income statistics, however, don’t tell the whole story of Americans’ living standards. Looking at a far more direct measure of American families’ economic status — household consumption — indicates that the gap between rich and poor is far less than most assume, and that the abstract, income-based way in which we measure the so-called poverty rate no longer applies to our society.

The top fifth of American households earned an average of $149,963 a year in 2006. As shown in the first accompanying chart, they spent $69,863 on food, clothing, shelter, utilities, transportation, health care and other categories of consumption. The rest of their income went largely to taxes and savings.

The bottom fifth earned just $9,974, but spent nearly twice that — an average of $18,153 a year. How is that possible? A look at the far right-hand column of the consumption chart, labeled “financial flows,” shows why: those lower-income families have access to various sources of spending money that doesn’t fall under taxable income. These sources include portions of sales of property like homes and cars and securities that are not subject to capital gains taxes, insurance policies redeemed, or the drawing down of bank accounts. While some of these families are mired in poverty, many (the exact proportion is unclear) are headed by retirees and those temporarily between jobs, and thus their low income total doesn’t accurately reflect their long-term financial status.

So, bearing this in mind, if we compare the incomes of the top and bottom fifths, we see a ratio of 15 to 1. If we turn to consumption, the gap declines to around 4 to 1. A similar narrowing takes place throughout all levels of income distribution. The middle 20 percent of families had incomes more than four times the bottom fifth. Yet their edge in consumption fell to about 2 to 1.

Let’s take the adjustments one step further. Richer households are larger — an average of 3.1 people in the top fifth, compared with 2.5 people in the middle fifth and 1.7 in the bottom fifth. If we look at consumption per person, the difference between the richest and poorest households falls to just 2.1 to 1. The average person in the middle fifth consumes just 29 percent more than someone living in a bottom-fifth household.

To understand why consumption is a better guideline of economic prosperity than income, it helps to consider how our lives have changed. Nearly all American families now have refrigerators, stoves, color TVs, telephones and radios. Air-conditioners, cars, VCRs or DVD players, microwave ovens, washing machines, clothes dryers and cellphones have reached more than 80 percent of households.

As the second chart, on the spread of consumption, shows, this wasn’t always so. The conveniences we take for granted today usually began as niche products only a few wealthy families could afford. In time, ownership spread through the levels of income distribution as rising wages and falling prices made them affordable in the currency that matters most — the amount of time one had to put in at work to gain the necessary purchasing power.

At the average wage, a VCR fell from 365 hours in 1972 to a mere two hours today. A cellphone dropped from 456 hours in 1984 to four hours. A personal computer, jazzed up with thousands of times the computing power of the 1984 I.B.M., declined from 435 hours to 25 hours. Even cars are taking a smaller toll on our bank accounts: in the past decade, the work-time price of a mid-size Ford sedan declined by 6 percent.

There are several reasons that the costs of goods have dropped so drastically, but perhaps the biggest is increased international trade. Imports lower prices directly. Cheaper inputs cut domestic companies’ costs. International competition forces producers everywhere to become more efficient and hold down prices. Nations do what they do best and trade for the rest.

Thus there is a certain perversity to suggestions that the proper reaction to a potential recession is to enact protectionist measures. While foreign competition may have eroded some American workers’ incomes, looking at consumption broadens our perspective. Simply put, the poor are less poor. Globalization extends and deepens a capitalist system that has for generations been lifting American living standards — for high-income households, of course, but for low-income ones as well.

W. Michael Cox is the senior vice president and chief economist

and Richard Alm is the senior economics writer

at the Federal Reserve Bank of Dallas.

You Are What You Spend, NYT, 10.2.2008,
http://www.nytimes.com/2008/02/10/opinion/10cox.html

Consumer Spending Falls Off

January 31, 2008
The New York Times
By MICHAEL M. GRYNBAUM

Consumer spending slowed in December and inflation continued to rise, the government said Thursday, leaving the Federal Reserve little leeway as it ponders policy decisions in the months ahead.

Spending by consumers, which accounts for more than two-thirds of the nation’s economic growth, rose by an anemic 0.2 percent in December after jumping 1 percent in November. Adjusted for inflation, spending was flat for the month.

Economists have predicted a significant downturn in spending as consumers grapple with record-high oil and food prices. The report from the Commerce Department reinforces the disappointing holiday sales figures that leading retail chains released in the last few weeks.

“With the labor market weakening and housing remaining a huge weight, the pace of consumer spending growth ought to remain painfully slow in the months ahead,” wrote Joshua Shapiro, an economist at MFR, a research firm.

As spending slows, prices continue to rise, a combination that has some economists suggesting the United States could face a period of stagflation. A closely watched gauge of inflation ticked up last month, to a 2.2 percent annual rate; that figure, the core personal consumption expenditures deflator, excludes prices of food and energy.

Over all, prices in December were 3.5 percent higher than they were a year ago, far above the Fed’s so-called “comfort zone” of 1 percent to 2 percent.

High inflation puts the Fed in a difficult situation. The central bank primarily sets monetary policy by changing a key interest rate. Lowering the rate stimulates growth, but also causes prices to rise, creating an increased inflation risk.

In its most recent policy statement, released Wednesday, Fed officials said they expect inflation “to moderate in coming quarters, but it will be necessary to continue to monitor inflation developments carefully.”

The Commerce Department report also showed that personal income levels rose 0.5 percent in December. Disposable income — after-tax salary adjusted for inflation — rose 2.1 percent since December 2006.A separate report from the Labor Department showed that new unemployment claims, a leading indicator of the labor market, increased by 69,000, to 375,000, in the week ended Jan. 26. It was the highest level since October 2005.

Meanwhile, a Chicago-based barometer of business activity fell in January. New orders dropped sharply to the lowest level since May 2003, and the price of production rose, underscoring the impact of high inflation on business owners.

“These numbers are not at recession levels, but they are only one bad month away,” wrote Ian Shepherdson, a London-based economist at High Frequency Economics, in a note to clients. “The manufacturing sector is coming under increasing pressure.”

The report, issued by the Chicago arm of the National Association of Purchasing Management, may not bode well for the ISM manufacturing index, a closely watched indicator of United States business activity. The index for December will be released on Friday.

Employment at Chicago-area businesses also fell this month. Over all, the index dropped to 51.5 from 56.4 in December.

Consumer Spending Falls Off, NYT, 31.1.2008,
http://www.nytimes.com/2008/01/31/business/31cnd-econ.html

Inflation Continues to Edge Up

January 16, 2008
The New York Times
By MICHAEL M. GRYNBAUM

Inflation continued to creep up in December, but the rise in prices will likely do little to hold back an interest rate cut by the Federal Reserve this month.

The consumer price index rose 0.3 percent last month, the Labor Department said on Wednesday. The increase was more than expected but also marked a slowdown from a 0.8 percent rise in November.

Prices have been pushed up this year by significant increases in the cost of oil and food. Over all, inflation rose by 4.1 percent in 2007, one of the highest rates in decades.

But some economists focus on the core figure, which removes the volatile costs of food and energy and provides a better sense of inflation’s effect on the broader economy. Core inflation rose 0.2 percent in December and 2.4 percent for the year, slightly above comfortable levels but still relatively contained.

Top Fed officials have said they are closely monitoring inflation levels as they weigh a fourth consecutive cut to the benchmark federal funds rate. Lower interest rates stimulate economic activity but can also contribute to rising prices.

But the central bank appears focused on the current risks to growth, in light of the recent housing downturn and continuing problems in the credit market. Investors expect a half-point cut when Fed policy makers meet on Jan. 29 and 30.

The December report does suggest that the purchasing power of American workers is steadily being eroded. The cost of gasoline rose nearly 30 percent in 2007, and medical care costs also soared. Commodities and food prices ticked up about 5 percent for the year.

Inflation Continues to Edge Up, NYT, 16.1.2008,
http://www.nytimes.com/2008/01/16/business/16cnd-econ.html

Americans Cut Back Sharply

on Spending

January 14, 2008

The New York Times

By MICHAEL BARBARO

and LOUIS UCHITELLE

Strong evidence is emerging that consumer spending, a bulwark against recession over the last year even as energy prices surged and the housing market sputtered, has begun to slow sharply at every level of the American economy, from the working class to the wealthy.

The abrupt pullback raises the possibility that the country may be experiencing a rare decline in personal consumption, not just a slower rate of growth. Such a decline would be the first since 1991, and it would almost certainly push the entire economy into a recession in the middle of an election year.

There are mounting anecdotal signs that beginning in December Americans cut back significantly on personal consumption, which accounts for 70 percent of the economy.

A raft of consumer companies — high-end stores like Nordstrom and Tiffany, and middle-of-the-road ones like Target and J. C. Penney — reported a pronounced slowdown in growth last month, and in several cases an outright drop in business.

American Express said that starting in early December the growth in the rate of spending by its 52 million cardholders, a generally affluent group of consumers, fell 3 percentage points, from 13 percent to 10 percent, the first slowdown since the 2001 recession.

And consumer confidence, an important barometer of economic health, has plunged. Andrew Kohut, president of the Pew Research Center, says consumer satisfaction with the economy has reached a 15-year low, according to the firm’s polling.

Even wealthier consumers, who were seen as invulnerable to rising gasoline prices and falling home values, are feeling the squeeze.

“People are clearly concerned that we are headed into a recession,” said Stephen I. Sadove, the chief executive of Saks Fifth Avenue, the upscale department store whose runaway growth throughout much of the year slowed markedly in December.

Gia Trumpler, 37, a travel consultant who lives in Manhattan, shops at luxury chains like Saks. But she is trimming costs where she can by bringing lunch to work from home, rather than eating out. “Everything just feels more expensive to me now,” she said, including the cost of heating her apartment this winter.

There are plenty of recession naysayers. Average hourly wages and salaries have not fallen, and some economists argue that unless — or until — that happens, consumer spending will hold up despite widespread economic unease. According to these economists, what happened in December was a temporary blip.

“Incomes have managed to hold up,” said Chris Varvares, president of Macroeconomic Advisers, an economic forecasting firm, who added that the data to date did not support the view that a recession was inevitable.

Even in tough economic times Americans rarely reduce their consumption, preferring instead to slow the growth in their spending. Since 1980, they have cut spending in only five quarters — a total of 15 months — most of them in the depths of a recession. The 2001 recession passed without a cutback in consumer spending.

Only once before, in 1980, did consumer spending fall during a presidential election year, helping Ronald Reagan in his campaign against Jimmy Carter, the Democratic incumbent.

Official statistics do not yet show that consumer spending has dropped, but they do suggest that in late 2007, it slowed in areas like automobiles, furniture, building materials and health care, said Mark M. Zandi, chief economist at Moody’s Economy.com.

Fresh evidence of a pullback is pouring in from many quarters as Americans confront the triple threats of higher energy costs, falling home prices and a volatile stock market.

Perhaps the strongest barometer over the last 30 days is the performance of the country’s big chain stores. December turned out to be a blood bath for retailers at every rung on the economic ladder, with sales for the month growing at the slowest rate in seven years.

Sales at stores open at least a year, a crucial yardstick in retailing, plunged by 11 percent at Kohl’s and 7.9 percent at Macy’s, compared with last year.

Chains that cater to the middle and upper classes, which have benefited from years of trading up — when customers splurge on select expensive products — struggled as well. Coach, the leather goods maker, said sales of its popular handbags had become sluggish, prompting the company to issue rare coupons to drum up business.

“This is the real deal — consumers are slowing down across the spectrum,” said David Schick, a retail analyst at Stifel Nicolaus.

But it is the trouble at the highest reaches of retailing that has economists most worried about a recession. Over the last year, even as low-wage and middle-income consumers have cut back, the wealthy have spent freely, keeping high-end chains insulated from the economic turbulence.

That started to change in December, as shoppers held off on buying $300 designer shoes and $500 dresses. For example, store sales fell 4 percent at Nordstrom, the high-end department store.

And Tiffany, the upscale jeweler, said the number of purchases at its stores dropped last month. In an interview, its chief executive, Michael J. Kowalski, said that even if the wealthy remain so at least on paper, their economic anxiety is taking a toll.

“It’s a reaction to the general economic uncertainty everyone is feeling,” he said. “There are housing price declines and financial market instability. There is a lot of caution out there, and it’s reflected in jewelry sales.”

At the same time, the number of overdue payments on American Express cards is surging, the company said — and this among well-heeled cardholders who charge up to $12,000 a year, on average, on each card. American Express has called some cardholders in the last few weeks to ask if they will have trouble paying their bills.

“We are seeing a correlation with housing prices,” said Michael O’Neill, a spokesman for American Express. “The falloff in spending is everywhere in the country, but it is greatest in those areas like south Florida and California, where home prices have fallen the most.”

The big exception is gasoline. American Express and the Consumer Federation of America say that consumers are buying just as many gallons as ever, but paying more for them, and that has forced cutbacks in other purchases. Gasoline prices usually drop after the summer driving season, but this year they shot up, from $2.85 a gallon on average in September to $3.07 in December and $3.15 in the first week of January.

A similar trend is evident in the cost of natural gas, electricity and home heating oil. “We built these big houses in the suburbs, which need a lot of energy to stay warm and a car to go shopping,” said Stephen Brobeck, executive director of the Consumer Federation. “And we can’t change that quickly.”

The impact of rising gasoline prices “is just profound on middle- and lower-income families,” said Mr. Kohut of the Pew center. “Our surveys are showing one of the lowest levels of satisfaction with national conditions in any recent presidential election year. You have to go back to 1992 to get a lower number of people saying the national economy is excellent or good.”

The nation was recovering from recession that year. Consumer spending had contracted in two separate quarters in 1991, and while economic growth was gradually accelerating as Bill Clinton and George H. W. Bush sought the presidency, the Clinton camp famously posted a sign in its campaign war room proclaiming, “It’s the economy, stupid.”

There are some bright spots now in consumer spending. Sales of sports gear and electronic gadgets — particularly G.P.S. navigation devices and flat-panel television sets — have risen over the last three months. To Stephen Baker, vice president for industry analysis at the research firm NPD Group, that suggests there is still enough purchasing power for people to buy what they really want.

“We probably would not have seen strong sales for electronics products that people really want if the overriding issue was economic,” Mr. Baker said.

But not everyone is splurging. Jinal Shah, 22, a college senior in New York, said she wanted to buy the popular Nintendo Wii video game system as a gift for herself this holiday season, but had second thoughts because of the $250 price tag. She ended up not purchasing it.

“You have to make choices,” she said. “I get the Wii, or I go out more. I am just much more aware of the tradeoff now.”

Louise Story contributed reporting.

Americans Cut Back Sharply on Spending,
NYT, 14.1.2008,
http://www.nytimes.com/2008/01/14/
business/14spend.html

Consumer Confidence

Sinks to Record Low

January 11, 2008

Filed at 6:44 a.m. ET

The New York Times

By THE ASSOCIATED PRESS

WASHINGTON (AP) -- Consumer confidence fell to an all-time low as worries about jobs, energy bills and home foreclosures darkened people's feelings about the country's economic health and their own financial well-being.

According to the RBC Cash Index, confidence tumbled to a mark of 56.3 in early January. That compares with a reading of 65.9 in December -- and a benchmark of 100 -- and was the worst since the index began in 2002.

''People are anxious because everything sounds pretty awful these days,'' said Bill Cheney, chief economist at John Hancock Financial Services Group.

Economists cited several factors for consumers' gloomy outlook:

--Hiring practically stalled in December, pushing the unemployment rate to 5 percent, a two-year high, the government reported last week.

--The meltdown in the housing market has dragged down home values and made people feel less wealthy.

--Harder-to-get credit has made it difficult for some to make big-ticket purchases.

--High energy prices are squeezing wallets and pocketbooks.

--There has been much hand-wringing on Wall Street and Main Street as to whether all these problems will plunge the country into recession.

''Consumers are gloomy. The confidence reading suggests that people believe bad times are upon us,'' said Richard Yamarone, economist at Argus Research.

Over the past year, consumer confidence has eroded sharply as housing and credit woes took their toll. Last January, confidence stood at a solid 95.3. The index is based on the results of the international polling firm Ipsos.

The White House is exploring a rescue plan, possibly including a tax cut, to aid the ailing economy. Federal Reserve Chairman Ben Bernanke, criticized for not doing enough, pledged on Thursday to keep lowering interest rates. They are expected to drop by as much as one-half of a percentage point when central bank policymakers meet later this month.

The public is giving President Bush low marks for his economic stewardship. His approval rating on the economy dipped slightly to 33 percent in January, from 36 percent in December, according to a separate Associated Press-Ipsos poll. His overall job-approval rating was 34 percent, compared with 36 percent last month.

Individuals' sentiments about the economy and their own financial fortunes over the next six months actually fell into negative territory in early January. This gauge came in at a negative 8.2 percent. That was the weakest showing since right after the Gulf Coast hurricanes in August 2005.

Another measure looking at current economic conditions dropped to 78.9 in January. That was the lowest reading since early March 2003, when U.S. troops invaded Iraq.

Oil prices recently surged past $100 a barrel, though the price has moderated somewhat. Gasoline has topped $3 a gallon. Those high energy costs for fueling cars and heating homes are leaving people with less money to spend elsewhere, analysts say. In turn, prices for some other goods and services have risen.

Economists keep close tabs on confidence barometers for clues about people's willingness to spend.

A gauge of attitudes about investing, including comfort in making major purchases, dipped to 76.3 in January. That was the lowest since May 2005.

The housing slump, weaker home values, harder-to-get credit and high energy prices all ''seem likely to weigh on consumer spending as we move into 2008,'' Bernanke said Thursday.

Many economists believe upcoming reports will show the economy grew at a feeble pace of just 1.5 percent or less in the final three months of last year and will be weak in the first three months of this year. Major retailers reported weak sales for December.

Another index tracking consumers' feelings about employment conditions fell to 106.9 in January, a two-year low.

Government and private employers last month added the fewest new jobs to their payrolls in more than four years. In fact, employment at private companies alone actually declined. The jobless rate climbed to 5 percent in December, from 4.7 percent. The Labor Department's report, issued last week, stoked fears about a recession.

The RBC consumer confidence index was based on responses from 1,027 adults surveyed Monday through Wednesday about their attitudes on personal finance and the economy. The survey was taken after the employment report but before Bernanke's comments Thursday signaling additional rate cuts. Results of the survey had a margin of sampling error of plus or minus 3 percentage points.

The overall confidence index is benchmarked to a reading of 100 in January 2002, when Ipsos started the survey.

Consumer Confidence Sinks to Record Low,
NYT, 11.1.2008,
http://www.nytimes.com/aponline/us/
AP-Consumer-Confidence.html - broken link

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