Americans clutch wallets

In a shift that is hampering the economy's faltering recovery, American shoppers are growing more cautious in their visits to malls and grocery stores.

The "shop 'til you drop" attitude is going out of style.

Plunging stock prices have decreased the wealth of many shoppers, especially those with high incomes. Millions of households are up to their eyeballs in debt. The Iraqi war threat, continued layoffs, and worries that another corporate scandal could emerge add to their unease.

Today, the Commerce Department is expected to release numbers showing a drop in retail sales for September, representing a retrenchment after three months of gains. One reason is that automobile sales fell off 13 percent in September after a fantastic 18.6 million annual pace in August, stimulated by zero-interest financing.

But the underlying question – on which the economy's pace in the months ahead will largely depend – is whether consumers are reaching the limits of their resilience.

They kept on spending during last year's recession. The events of Sept. 11 didn't keep them away from stores for long. Christmas sales last year were up 5.6 percent – higher than industry-watchers had anticipated.

Worried retailers this year hope for another modest rise. But signs of caution are mounting. At Tocco Classico, a hair salon in Cambridge, Mass. "Instead of a haircut every month, it stretches out [for regular customers] to every two months," says proprietor Brigitte Guarino. And there are fewer "walk ins."

Chain-store sales, meanwhile, fell 0.7 percent in September, compared with the prior month.

"There is more stress out there than in the past," notes Cynthia Latta, chief economist of DRI-WEFA, an economic consulting firm based in Lexington, Mass.

Still, the National Retail Federation in Washington forecasts that this year's holiday retail sales – those in November and December – will be up 4 percent from 2001, not counting inflation.

Merchants, though, are wondering how when rising debt loads may crimp spending.

The debt-service burden in relation to disposable income – that is, earnings after taxes, has reached a record high of 103 percent. On the other side, interest rates are at 40-year lows.

In August, the growth in household borrowing slowed sharply, posting the smallest gain in eight months. Outstanding consumer credit rose by $4.2 billion, the Federal Reserve said.

SINCE consumer spending accounts for about two-thirds of gross domestic product, the total national output of goods and services, economists keep a sharp eye on its level.

"It's important to know whether we are ratcheting down to a new level of modest growth or falling to a less-than-trend pace," says Peter Kretzmer, an economist at Banc of America Securities in New York.

In September, warm weather in the Northeast kept customers from stocking up on sweaters and other warm clothes. And storms in the south kept them at home.

But economists figure the weather will "cooperate" and consumers will return to the malls and other stores in greater numbers in the days ahead.

If they don't, and instead put more of their pay into savings, it will enlarge the risk of a double-dip in the economy – a slower pace or even a return to recession. Already many economists have been marking down their forecasts for the current quarter.

For example, Jack Lavery, a consulting economist in Washington Crossing, N.J., says GDP will slow dramatically from a nearly 5 percent annualized rate in the summer quarter to about 2 percent real growth in year's final three months. Consumer sentiment has fallen to its lowest level in 10 months.

But not every business is hurt by the gloom. Driss Affany at Crimson Cleaners, in Cambridge, notes that more customers are wearing suits or other formal wear that need dry cleaning.

"When people are scared of losing their jobs, they won't dress like before," he says. "Before it was South Beach, Florida, it was having fun. Now it's serious."

Consumers are being pushed and pulled by several factors.

The total value of all corporate stocks in the United States has plunged $8.4 trillion since the market's peak in March 2000. About half of American households own at least some stock.

Households seem to adjust their spending gradually to such a change in wealth.

Homeowners have been taking value out of their homes to maintain spending. Since early 2001, about 17 million mortgages have been refinanced, for a total value of $2.1 trillion. That reduces monthly payments and frees up cash for spending.

A recent survey by Cambridge Consumer Credit Index found that of those homeowners who are refinancing, 15 percent planned to pay off credit card debt, another 23 percent to reduce other expensive debt, 20 percent to improve their homes or buy a car, and 31 percent to save more.

The continued strength in housing is also seen as positive. New owners spend heavily on household goods of all sorts.

Another key to consumer spending is that with rising productivity, businesses have been able to increase the pay of their employees by a bit more than the rise in prices. So unless they have lost their jobs, consumers do have money to spend. But as people see others laid off, they have become more prudent with their money.

There is a shift from buying in department stores to discount-oriented places, notes Barton Weitz, a marketing professor at the University of Florida in Gainesville.

Even grocers are feeling the pinch. Nicholas Aiello, manager of the upscale market Deluca's in Boston, has stopped stocking some high-end foods. Caviar comes only on special order.

• Marius Hentea contributed to this report.