Don't bet on economic recovery just yet

WASHINGTON —

In January, after putting the kids to bed, Mary Morrill and her husband spread their monthly bills, grocery receipts and checkbooks on the kitchen table and began the first of several long nights finding ways to cut spending — especially with credit cards.

They would pack their own lunches, write dinner menus to curb impulse buying at the grocery, even cut out trips to McDonald's, which had been a treat for the kids and a convenience for the Morrills. And it all worked.

"We literally have not charged anything for almost a year," said Mary, 39, who lives with her husband and two children outside Cedar Rapids, Iowa. "If anything, we really feel like the bad economy was a wake-up call for us. In the long run it's going to help us. It's a reality check."

The Morrills' ability to make and stick to their first family budget in nine years of marriage, as well as their success in paring down what had been more than $10,000 in credit-card debt, may seem entirely admirable.

But good as it may be for the Morrills themselves, their decision to batten down the hatches and stick to their newfound frugality month after month adds to a growing body of evidence that casts a potentially dark shadow over the economy as a whole.

After the most punishing downturn in half a century, the U.S. economy has begun showing signs of life. Stock prices and factory orders are up. The housing market appears to be stabilizing. Job losses are moderating.

Welcome as all those developments are, many analysts worry that they might not be enough to offset another trend: The continuing refusal — or in many cases the inability — of millions of American consumers to spend money the way they did before the crash.

Since consumer spending now accounts for 70 percent of all economic activity, a resurgence of spending by people such as the Morrills is considered indispensable for a robust and sustained recovery.

In times past, when things improved, people went back to spending. This time, maybe not.

When American Express asked a sampling of 2,032 people late last month what they would do if they found $500, the answers were like a pitcher of ice water in the face of retailers. Survey respondents were offered a list of possible spending choices that included splurging at a restaurant, going on a shopping spree and taking a trip.

But 10 percent or fewer marked one of those items. Most went down the list and checked off paying regular bills, reducing credit-card debt or simply saving the money.

"What we see consumers doing is exhibiting a level of discipline that we didn't know," said Gail Wasserman, a spokeswoman for American Express, which like other card companies has reinforced the reduced-spending trend by issuing fewer cards and slashing credit lines to reduce their own risks.

"It's very clear consumers have hit the reset button. They've re-evaluated their priorities and separated their wants from their needs," Wasserman said.

How long this change in behavior will last is anybody's guess. But there's more than consumer psychology involved. Beyond the fears aroused by the recession's layoffs, lost homes, shriveled retirement savings and other setbacks are barriers to renewed spending that cannot be swept away by consumers simply regaining a sunny outlook.

To begin with, analysts say, there is the heavy load of indebtedness that American consumers will be carrying when the recession ends. Collectively, U.S. household debt rose to a high of 133 percent of after-tax income in 2007, double the ratio in the mid-1980s, according to Federal Reserve data.

One positive trend of late is the stock market. The run-up has helped restore $2 trillion of wealth in the second quarter, according to Fed data, and also appears to be lifting consumer confidence as well.

But economists say it won't be until 2012, at the earliest, before households recoup the remaining $12.2 trillion of wealth lost in the prior six quarters.

Then there's high unemployment. Government and private economists widely expect the jobless rate, 9.7 percent in August, to hit 10 percent soon and then remain high for at least the next two to three years. That will tend to restrain wage gains and keep many workers anxious about their jobs.

"Job and income prospects are critical to the outlook for consumer spending," said Richard Curtin, director of the University of Michigan survey of consumer attitudes.

One early and important test will come at Christmas. Retail-industry experts such as Howard Davidowitz see big trouble ahead, similar to the disappointing back-to-school season.

"This year will be worse than last year," said the chairman of Davidowitz & Associates, a national retail-consulting and investment-banking company.

He rattled off a list of retailers, including Target, Home Depot and Limited.

"They're all down," he said.

It's even worse for the high-end segment, he said, which is particularly worrisome because the wealthy account for the bulk of the saving and spending.

"We're closing 2,000 jewelry stores this year. ... Luxury is getting killed," Davidowitz said.

Marshal Cohen, chief analyst for market-research company NPD, is more sanguine. He says his monthly survey of 65,000 people shows consumer confidence has been stabilizing since March. He thinks Christmas holiday sales will outperform last year.

Cohen is skeptical that consumers have changed from spenders to savers. Still, he says there's no question that heavy debts will weigh on consumers for some time.

"The last five years were an abnormality. Consumers had an endless sea of aspirations, with credit supporting it. Everybody was spending like they were millionaires," he said. "Now they're thinking twice before they buy anything. We're going back to the time when consumers had scruples and discretion."