Frugality: The new normal in America?

CHICAGO — A year after “shop ‘til you drop” stopped, the nation fixates on this question: Will consumer spending ever return to pre-recession levels?

Increasingly, the answer appears to be no. Belt-tightening in bad times is normal. And after every other recession since World War II, penny-pinching quickly fell out of fashion and Americans resumed their demand for houses, cars and everything else.

This time, it’s different. Like the Great Depression in the 1930s, the Great Recession seems destined to turn many Americans into lasting coupon-cutters, scrimpers and savers. Consumers dug a debt hole over the past decade from which there’s no easy climb out. The population segment that drives spending the most - baby boomers - faces special pressure: Boomers are running out of time.

A study by research firm AlixPartners concluded that once a new normal sets in after this recession ends, Americans will spend at about 86 percent of their pre-downturn level. In an economy driven by consumption, the implications are far-reaching.

Frugality may be good for family budgets, but it’s bad for the national economy. And that has the potential to reinforce and continue the miserly mood. A Gallup survey last month found seven in 10 Americans are cutting weekly expenses - a number that has been consistent through the summer.

A year after last fall’s financial meltdown turned a garden-variety recession into the worst downturn since the Depression, thriftiness is still driven by the twin engines of necessity and fear. Unemployment, now at 9.7 percent, is still rising and expected to reach double digits before year’s end for the first time since 1982. Many who still have jobs are getting paid less, and investments have a long way to go before they return to pre-meltdown levels.

Kathy Haney, 46, of Orland Park, Ill., has a job but is scaling back her shopping and packing her lunch.

“You put your priorities in different places because you never know if you’re going to have a job tomorrow,” the legal secretary says. “You think twice now. I have six TVs in the house. Do I really need a new flat screen?”

For her and many other Americans, the answer is no. The underlying causes of the meltdown and where it left millions financially suggests a fundamental change is under way. Personal spending has fallen in four of the last six quarters - the only time that’s happened since quarterly records were first compiled in 1947.

Until the Great Recession, the worst recession since World War II was in 1981-82. Unemployment peaked at 10.8 percent in December 1982, a month after the recession had ended. The recovery that followed was powered by baby boomers, they were mostly in their 20s and early 30s then. Their careers were taking off, they were starting families, and they were spending freely. On homes, furniture, cars - and everything else.

Fueled by boomers, when the recession ended, growth was explosive. Consumer spending rose 5.7 percent in 1983. Gross domestic product rose 4.5 percent in ‘83 and 7.2 percent in 1984.

“If someone gets more comfortable, they spend a little more,” says Erik Hurst, an economist at the University of Chicago’s Booth School of Business. “As they spend a little more, someone else spends more.”

Fast-forward to today. For most of this decade, Americans enjoyed a credit-fueled binge that allowed them to spend more than they made. They snatched up everything from gadgets to houses.

Those houses soared in value and became as valuable a source of cash as a bank ATM. Home equity was tapped to pay for vacations, new cars and kitchen renovations. The rising stock market gave people an inflated sense of wealth as they watched their retirement accounts grow.

When the party ended, the nation was left with more than just a hangover. Personal debt had doubled in a decade. As of July, it stood at $13.8 trillion, or about $124,000 per household. And despite months of frugality, that was only slightly below its 2008 peak. It will take years to work down the debt, which will prolong people’s thriftiness. Paying it down will be harder because of the layoffs, pay cuts, freezes and furloughs.

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