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In tough times, US consumers forging new behaviors

American spending has fallen further in the past six months than it has since 1974.

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President Obama has expressed the same view, even as he is trying to take steps that will revive consumer confidence from its current lows. In a radio address Saturday, he said economic recovery will take “years, not months.”

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The nation’s two most recent recessions, in 2001 and 1990-91, were relatively short but were followed by so-called jobless recoveries, in which it took several years before the economy started humming.

This time around, the same concern is at play, magnified by several forces affecting consumers:

•An unusually large slide in home prices has reversed a “wealth effect,” where households spend more when they feel their net worth is rising.

•Many consumers are postponing purchases, figuring that a house or a flat-screen TV may be cheaper three months from now.

•Even many workers who aren’t losing jobs face pay cuts or reduced hours of work.

•Credit conditions have become tighter and consumers are less interested in piling on debt. The level of household debt as a percentage of GDP has doubled since 1980, but now some forecasters expect it to decline for the first time in generations.

What makes people spend

What might get consumer spending to rise again?

A stimulus plan in Congress is expected to include tax cuts that will show up on pay stubs quickly. That can fill some of the hole in consumer spending, which should, in turn, help reduce the decline in jobs.
Borrowers who can get a mortgage refinance will reap extra cash – and spend at least some of the savings.

Another key is investor sentiment. If the stimulus or bank-recovery policies cause investors to anticipate the recession’s end, the result could be a rising stock market that boosts consumer confidence.

Similarly, any progress in ending home-price declines and the related problem of foreclosures could have powerful effects on confidence.

“Just give everybody a tax credit who buys a house,” suggests Michael Cosgrove of the University of Dallas, who publishes forecasts in the EconoClast newsletter. With interest rates low, a $10,000 credit that’s available only during this year might spur more people to buy. Something similar could be done for automobiles, which alone accounted for a big chunk of the recent drop in consumer spending.

Businesses are trying their own ways to overcome consumer fears. The Korean automaker Hyundai says it is drawing interest with its latest buyer enticement, which was advertised during the Super Bowl. The carmaker offers an “assurance” program, so that buyers who finance their purchase of a new car can return the car, and get their money back, if they lose their job.

Home affordability improves

Homes are now very affordable in general, according to an index that pulls together data on average incomes, home prices, and mortgages costs. But the foreclosure wave means a glut of unsold homes still hangs on the market.

Ms. Byrne, who works as a real estate agent in Natick, Mass., says potential buyers are out there, just waiting for the right catalyst to make a bid.

“I’m hoping with the new administration and the work they’re doing to recover the economy, that things will stabilize,” she says.

It may take a while for the economy to rebuild momentum. But as a bottom is reached and fear recedes, the tendency of consumers to spend will revive.

The pace may be moderate, but Mayland in Ohio expects that consumer spending will be rising again later this year.