Public slows down buying

Belt-tightening a key to decline in economic growth

July 29, 2006|By MOLLY HENNESSY-FISKE | MOLLY HENNESSY-FISKE,LOS ANGELES TIMES

Conserving her family's cash as costs rise, Riverside, Calif., resident Laureen Pittman is postponing vacations, home repairs and other big purchases. For necessities, she is increasingly relying on discount retailers.

Belt-tightening by consumers such as Pittman is a key reason why the U.S. economy is slowing. Inflation-adjusted economic growth fell to a surprisingly sluggish 2.5 percent in the second quarter from 5.6 percent in the previous three months, largely because of slower consumer spending, the Commerce Department reported yesterday.

The economy's latest growth rate was below the expected 3 percent, which is average for an economic expansion. It triggered a rally in stock and bond markets as investors boosted their expectations that the Federal Reserve will soon halt its anti-inflation campaign of raising interest rates.

Consumers - accustomed in recent years to spending more than they earn, saving little and tapping home equity to pay the bills - have clearly been hit by gasoline prices at $3 a gallon or more. Whether that and other worries prompt consumers to scale back even more will largely determine whether the economy can maintain a slower but steady "soft landing," or veer toward recession, economists say.

But today's consumers - whose spending accounts for two-thirds of growth- are increasingly resilient, able to maintain their standard of living thanks to the global economy, experts say. Such globalization has a dual effect: While cheap labor abroad suppresses wages, it also provides consumers with low-cost goods, keeping U.S. inflation lower. "Without that international globalization, the consumer would probably be hit with an even bigger squeeze between income and outcome," said Ken Goldstein, an economist at the Conference Board, a New York-based business research organization.

Consumers are also protected by a more stable job market. Employers are trying to increase efficiency with more technology and fewer new hires, leading to fewer job cutbacks.

Any recession is likely to be milder than those in the past, because many jobs in manufacturing - once the most volatile part of the economy - have been outsourced, removing the possibility of huge layoffs that sparked severe recessions, said Edward Leamer, director of the UCLA Anderson Forecast.

"It's possible consumers can weather financial storms better than before, because they're more able to deal with the ups and downs of the economy," Leamer said.

These trends contribute to consumers' "being able to adapt, and [that] minimizes the severity of a downturn," said Rosalind Wells, chief economist with the National Retail Federation in Washington. The last two recessions - in 1990-1991 and 2001 - were relatively mild by historical standards, Wells said.

Riverside resident Pittman illustrates how today's consumers cope with tighter times.

During the past six months, the 42-year-old stay-at-home mother, whose husband works as a local prosecutor, has seen her budget shrink. The Pittmans postponed weekend vacations to Disneyland and the beach, the purchase of a new car, and repairs to the bathroom and deck at their 25-year-old home. With her 15- and 6-year-old sons in school, little savings and rising costs, Laureen Pittman is considering returning to work as a paralegal.

But she isn't cutting back on everyday needs, just changing where she shops. She has gone from shopping for her family at full-price stores to deep discounters, where she hunts for bargain blue jeans and handbags.

"It's mostly the bigger things we cut back on," Pittman said. "But we can't really cut back on necessities - groceries and back-to-school."

Partly because of consumers' ability to cope, most analysts expect annualized economic growth to remain between 2.5 percent and 3 percent for the rest of the year. As long as consumer spending continues to grow by more than 1 percent and the Fed keeps inflation under control, a recession is unlikely, said Jan Hatzius, an economist with Goldman Sachs.

The cooling housing market presents a risk and might be undercutting overall consumer spending as fewer people count on rising home equity to finance trips to the mall. Consumer spending grew by only 2.5 percent in the second quarter, down from 4.8 percent in the first quarter, mostly reflecting declining purchases of big-ticket items such as autos, according to the Commerce Department report yesterday. Investment in residential real estate contracted for the third straight quarter by a sizable 6.3 percent, marking the first three-quarter decline in more than a decade.

"People were selling part of their house to finance dinner at Olive Garden," said Dirk van Dijk, director of research at Chicago-based Zacks Investment Research. "You can play that game as long as the price of housing is going up. You take that away, and it becomes a scary proposition."

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