MarksJarvis: Fear continues to grip consumers, economy

Lack of spending ripples all the way to Wall Street

When you've been forced to the edge of a cliff and feared a wisp of wind would send you into the abyss, you don't forget that feeling quickly.

And that seems to be the mindset of U.S. consumers as they carry the financial and emotional scars of the Great Recession. Not only are 11.5 million people still looking for work, but many who have found jobs remain haunted by damaged credit scores and struggles to hold on to homes.

Even while many seem to be feeling strong enough financially to replace worn-out cars and refrigerators, they are cautious about spending broadly.

That reluctance has sent chills through the stock market, as retailers as diverse as Wal-Mart, Macy's and Nordstrom disappointed investors with second-quarter sales and acknowledged the difficulties of selling to cautious consumers.

Retail spending is much improved since the depths of the recession in 2009, and the SPDR S&P retail exchange traded fund has climbed 27 percent as analysts adopted great expectations for consumers this year. But retail spending still falls short of pre-recession numbers. From 2001 to 2007, sales climbed on average 4.9 percent a year. Last quarter's increase was only 4.2 percent year over year, and it lagged the 20-year average of 4.5 percent, according to Moody's Analytics economist Ben Garber.

The implications for the economy are significant since U.S. consumers are key to growth. Reticent consumers leave businesses struggling to sell. In turn businesses avoid adding new employees.

"Consumer spending supports the expansion, yet it has yet to break out to levels that would fuel solid GDP growth," Garber said. "Retail sales outside of the auto sector has a subpar flavor."

With the average U.S. car now 11.4 years old, owners finally are giving up on nursing vehicles back to health and are buying new. In 1995, the average car on the road was only 8.4 years old, according to Polk, a market research firm.

Despite the expectation that car sales will total 16 million this year and reach pre-recession levels again, consumers seem to be cutting back on other purchases after buying big-ticket items like cars.

"Consumers are prioritizing," said R.J. Hottovy, a retail analyst at Morningstar. If they buy cars or spend on home repair materials at Home Depot, they may skip going to department stores or buying online, he said.

Hottovy says consumers have begun to feel the pressure of higher payroll taxes when wage growth is limited. The rise in payroll taxes didn't seem to matter to consumers earlier in the year, but it just took time for people to see the impact on their pay and realize "it wasn't going away," Hottovy said.

Before the recession, homeowners might have borrowed from their home equity and spent it redoing a kitchen or buying a car, while continuing to spend on other things. Now, with pay stagnant, home equity often nonexistent and the memories of plunging home values fresh, consumers are thinking twice about other purchases.

That's reasonable and healthy behavior for consumers. But investors — who expected more — dumped retail stocks in response to lackluster retail numbers last week.

In a recent back-to-school survey by the National Retail Federation, about 31 percent of consumers said they would spend less overall this year because of the economy. That's better than last year when 38 percent said they had to cut back, said Citigroup analyst Deborah Weinswig.

But the drag from the recession continues to pull at the economy. Although Americans have made progress paying off debts, many continue to work through problems.

Financial planner Glenda Moehlenpah has been helping a San Diego client pay off $80,000 in credit card debt and thousands of dollars in unpaid taxes and penalties to the IRS over the past three years. The woman got stuck in the housing crisis with a newly purchased retirement home in Florida and a San Diego condo she couldn't sell, and used credit cards to absorb the costs. Although she ultimately completed a short sale on the condo and stopped new drains on her finances, Moehlenpah said the woman "will be digging out for years."

"She's not out there helping the economy by shopping," said Moehlenpah. "She's living to the bone; working two jobs." Now that she's paid off $80,000 in credit card debt, the woman has to pay the IRS and replenish retirement savings.

Economist Ethan Harris, of Bank of America Merrill Lynch, thinks too many analysts have underestimated the long-term impact on growth as baby boomers fight the clock to accumulate the retirement savings they will need in a few years.

"Most forecasts for consumer spending assume a further pickup in growth, with a relatively steady saving rate," said Harris, nothing that "the baby bummer generation" will have to increase its savings.

Based on current retirement savings, he said, even if people work until age 65, "annuitize all their financial assets and put the maximum allowable reverse mortgage on their house (leaving virtually no assets for the next generation), more than half are still at risk of not being able to maintain their living standard in retirement."

Meanwhile, although consumer confidence has risen sharply for three months until a recent modest dip, 18 percent of workers are still worried about losing their jobs, according to a recent Gallup poll. Said Harris: "That argues for higher precautionary saving."

gmarksjarvis@tribune.com

Twitter @gailmarksjarvis

Featured Stories

CTnow is using Facebook comments on stories. To comment on ctnow.com articles, sign into Facebook and enter your comment in the field below. Comments will appear in your Facebook News Feed unless you choose otherwise. To report spam or abuse, click the X next to the comment. For guidelines on commenting, click here.

CONSUMER COLUMNISTS

Kevin Hunt - The Electronic Jungle

Kevin Hunt: How To Send Music Through Your Home's Powerline - April 2, 2014 - It's barely worth discussing how to upgrade a stodgy audio system with a wireless connection because once Apple's Airport Express enters...

Gail MarksJarvis

Tech's troubles stoke fear of market correction - April 16, 2014 - Now you see it; now you don't.

David Lazarus

When health insurers play games, patients lose - April 17, 2014 - Dr. Theodore Corwin, a plastic surgeon in Thousand Oaks for the last 30 years, has had run-ins with insurers before, but never one so...

Korky Vann

Malaysia Flight 370 Disappearance Adds To Flying Fears - April 14, 2014 - I'm a white-knuckle flier.

Advertisement

...