Will consumer queasiness drag down the economy?

August 31, 2011

Yuki Noguchi

(Kevork Djansezian)
Customers shop for kitchen appliances at a Home Depot store in the Hollywood section of Los Angeles.

When it comes to the economy, there's lots to worry about: Jobs, home prices, debt. And all those concerns seemed to have come together in the latest snapshot of consumer confidence — it plunged to its lowest level in two years.

The concern is that a country full of increasingly pessimistic consumers will stop spending and undermine the recovery.

But the relationship between consumer confidence and spending habits isn't at all straightforward.

Tim Dolan, a freelance photographer, says his business has grown in recent years. At a farmer's market in Los Angeles, Dolan says he still funnels money into anything having to do with his 1969 Buick Skylark, which he races every Thursday.

"I wouldn't hold back on that," he says. "That's my sport, my hobby, my love, you know, my obsession. So whatever I want I get.

Dolan budgets and tries not to waste money, but he also tries to avoid what he calls "a poverty mentality."

"I think, you know, you gotta keep spending," he says. "You can't tighten the purse strings because then you're going to choke the economy."

Americans still feeling financially insecure

The Conference Board, a private research firm, said its consumer confidence index stands at less than half of what it was before the recession. But consumer spending is actually higher than its highest levels four years ago.

"There's traditionally been a big departure between what consumers say and what consumers do with regards to their spending," says Greg McBride, a senior financial analyst for Bankrate.com, a personal finance website.

Consumers often talk more about cutting back than they actually do.

Then again, McBride says, the sluggish recovery has left Americans still feeling financially insecure. Companies aren't hiring, and people and companies are saving cash. And despite very low interest rates, there's no rush to buy homes.

McBride says all this suggests a possible break from the past, and that people may actually clamp down on their wallets.

"I think there's a risk that the spending is more closely tied to those consumer confidence levels than what we've seen in the past, particular given the tightness of credit and the penchant for consumers to pay down existing debt and work on boosting their anemic levels of savings," he says.

But if overall spending levels are slightly up, what's the worry?

McBride says right now, the country is barely maintaining its spending levels. A healthy economy requires new spending every month — consumer spending drives 70 percent of the U.S. economy.

"Even a minor cutback in consumers spending ripples very quickly through the overall economy," he says.

Cutting back and budgeting

But that's not enough for some consumers.

"I'm not going to spend money just because I feel like the economy needs me to spend it," says Eric Green, who works in public relations for the entertainment industry in Los Angeles.

He says he and his wife both maintained jobs through the crisis, but their house has lost value, they don't anticipate big raises and they have two young children. So, for the first time since college, Green says, he's budgeting.

"I had to buy a washer the other day, and it was like three months of research to find the best deal and wait for that sale to come, which I've never done before," he says.

Green says if more money came in, he'd like to say he'd take his family on vacation. But more realistically, he'd save it for private school tuition.

Chris Christopher, an economist with IHS Global Insight, says all the numbers he analyzes every day affect his confidence as a consumer.

"Things do make me nervous," he says.

Normally, Christopher says he replaces his car every four years, which means he's due to swap out his 2007 Cadillac Deville. Instead, he's waiting, and when he does get a new car, it'll be something modest.

"I'm not going to a Rolls Royce anytime soon," he says.

Christopher says he also opts for shorter vacations and hotels with fewer stars. But knowing what he knows about the U.S.'s dependence on consumer spending, he sometimes makes concerted efforts to spend.

He might splurge on a haircut, for example, or he'll try to shop at local stores and buy domestic products.

But until jobs, housing prices and stock portfolios make a full comeback, he says, his wallet and his confidence will remain at odds.

Copyright 2011 National Public Radio.
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