Americans Are Putting the Brakes on Spending

Many businesses and the economy as a whole will feel a big chill as consumers cut back.

By Jerome Idaszak, Associate Editor, The Kiplinger Letter

February 20, 2008

Americans are tightening their belts, and that spells change for the economy. The Consumer Age is hardly dead -- consumers won't suddenly lose their affection for new cars, fashions and new technology. But the age of superconsumption may be.

Consumer spending will gain about 1.7% a year in 2008 and 2009, after growing between 2.8% and 3.6% a year for the past five years.

"I think we've entered a new era in consumer spending," says Lyle Gramley, senior economic adviser at the Stanford Washington Research Group and a former Federal Reserve governor. "For the next few years at least, we're going to see a more disciplined consumer."

There are many reasons why consumers will ratchet down discretionary spending: Job worries, with unemployment on the rise. Stingier lending, as credit card companies tighten their standards, reduce spending limits and ignore falling interest rates elsewhere in the face of their own rising delinquencies. Higher gas prices, siphoning about $91 billion from consumers' discretionary income this year. And most of all, declining home prices, effectively ending the use of home equity as a cash machine to support consumer spending.

The result: A big hit to economic growth. From 1999 to 2007, the share of gross domestic product coming from consumer spending barreled from 68% to 72%, far more than that of most other developed economies. In the United Kingdom, consumers account for 66%. In Germany, 59%. And in Canada and Japan, 57%.

A drop back to 68% in the U.S., as we expect over the next three years, amounts to lopping about half a trillion a year off economic activity. That's three times as much as the total stimulus this year. And only about half of that stimulus will actually pump up the economy. A third of the taxpayer rebates will be saved or used to pay off debt. Business breaks won't spur more spending, they'll just add to profits.

Some industries will feel the pinch more than others:

• Automakers, especially those in Detroit. Already skidding and now headed onto a more treacherous track, they'll find it tough to marshal the resources for new models -- key to their turnaround plans. Their market share will deteriorate further and drag small suppliers down with them.

• Advertising firms. They're facing a buzz saw, with many customers -- food, retail, airlines, financial services, etc. -- cutting spending.

• Retailers, especially specialty apparel stores. Some will be swallowed up, and some will go belly-up.

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