Falling US consumer spending making tough times tougher

In a typical year, consumer spending goes up – rising on average by about 3 percent and representing about two-thirds of all economic activity in America. In records that go back to the 1930s, it's rare for consumer spending to post a calendar-year decline. With rising population and rising worker productivity, any such decline represents a serious setback.

In 1980, personal consumption declined by a fraction of a percentage point.

This year, many economists believe the drop will end up exceeding the sharp 0.8 percent decline seen in 1974, possibly approaching a level last seen in 1942, when spending fell by 2.3 percent.

Many of the forces buffeting consumers are more than psychological.

Homes, long the key source of household net worth, continue to fall in value in much of the country. Credit isn't as available. And the combination of the credit crunch and vanishing shoppers is causing businesses to cut back on employment.

Along with layoffs, many firms are cutting back on hours worked or on compensation. "Most of us are worried about being told … 'no pay raise, or maybe even a pay cut,' " says Ken Goldstein, an economist at the Conference Board, a research group in New York.

Normally a recession ends as consumer spending gathers new momentum.

To many economists it looks as if that process will take longer than usual. The loss of household wealth means that many families will be trying to pare down their debt, and rebuild savings, for some time to come.

That doesn't mean that the vaunted US consumer is permanently down and out. Many forecasters see personal spending heading up by about 2 percent in 2010 – below normal but a positive number. That hinges on the expectation that government stimulus and efforts to repair the nation's financial system are effective.

Derek Caissie, a Boston-area manager at an ink-cartridge store, says his pay hasn't been cut and his job seems secure for now. And he expects that, while it may take some time for consumers to repair their personal balance sheets, they will rebound.

"In five to 10 years people will be like they were a few years ago," he says. "They'll see that TV and say, 'I want that'."

Even now, the health of consumers varies widely.

"You've got an awful lot of people that have a very modest amount of debt, huge equity in a house, and pay their credit card balance in full every month," says Scott Lilly, an economic policy expert at the Center for American Progress in Washington.

"But people who are overextended are much more overextended than in the past."

Lloyd Williams, another Boston resident, just rushed to sell a building that he and his family had managed for years, because they needed to raise cash to cover credit card expenses.

It wasn't a move he had planned to make, but he's adapting to current times.

"You don't know if next month things are going to get better," he says.

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