Shoppers' fear shakes U.S. economy

ANNE D 'INNOCENZIO
Associated Press

The gloomiest outlook for the economy in 35 years may be forcing Americans to live with what they have and save up for what they want.

Lynda Nicely has been living in a sparsely furnished rental apartment in a Milwaukee suburb since October while she saves enough money for furniture at a second-hand store. And when temperatures soar this summer, she plans to buy a fan, not an air-conditioner.

"I am a little rattled, " said the 28-year-old resident of West Allis, who took a second job as a waitress and plans to hoard three months worth of emergency cash just in case she loses her primary job in public relations.

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A growing number of anxious people across all income segments are shopping at less-expensive stores, reacquainting themselves with the library, paying down credit-card debt and cutting back on new clothes and cars, vacations and meals out.

The psychology of the American consumer has turned as worries heighten about the job market, the slump in real estate and soaring daily living costs.

Industry followers say shoppers ' fear, which has been escalating since last July, could very well worsen what ails us.

Such spending cuts could be "a self-fulfilling prophesy " and could hasten the economy 's slide, said Lynn Franco, director of The Conference Board Consumer Research Center.

"I don 't think (the spending slump) has bottomed out, " said Candace Corlett, principal at consulting firm WSL Strategic Retail. "Shoppers are learning a new behavior: how to resist temptation. There is a lot of fear out there. "

Shopping at discounters

Such worries are driving shoppers to cut back on big-ticket items like appliances, delay redecorating their houses and shop at discounters like Wal-Mart and thrift stores for second-hand clothing. They 're particularly avoiding full-priced fashion chains and department stores at the mall.

Consumers have every right to be nervous -- the government data out Friday showed unemployment and job losses were higher than expected. It also reported only modest wage growth, which makes people feel like they are losing money as food and gas prices keep rising.

Shoppers ' economic outlook for the next six months is at a 35-year low, levels not seen since the oil embargo and the Watergate scandal, according to a reading last week by the Conference Board, a business-backed research group. The report showed that fewer consumers plan to buy big appliances like air-conditioners, TVs and refrigerators within the next six months.

Sluggish sales

Retailers struggled through yet another sluggish month, with March sales at stores open at least a year expected to fall slightly from a year earlier, according to the International Council of Shopping Centers-UBS tally.

J.C. Penney Co. warned last week of at least a 10 percent drop in same-store sales for March and slashed its first-quarter earnings forecast. Retailers are set to report final figures on Thursday.

Many analysts expect only a small sales lift starting in May when consumers begin receiving rebate checks from the federal government 's stimulus plan, but any bump should only be temporary. Michael P. Niemira, chief economist at the shopping center group, believes the malaise could extend into next year.

Consumers are also increasingly concerned about inflation, with the Energy Department anticipating that gas prices will peak near $3.50 a gallon this spring. Many analysts believe prices could go much higher.

Mounting debt payments are also making shoppers cut back on stuff they can live without. U.S. families now spend more money on debt service, absorbing more than 14 percent of disposable income, than on food, which accounts for 13 percent, according to a Merrill Lynch & Co. report. That is higher than during the last recession in 2001 when 13.2 percent of household disposable income went toward debt, Merrill Lynch said.

That shows how "deep the credit problem is in terms of its impact on household cash flow, " wrote Merrill Lynch economist David Rosenberg.

80,000 jobs cut

The latest Labor Department figures didn 't give consumers any comfort. Employers slashed 80,000 jobs in March, the most in five years and the third straight month of losses. The national unemployment rate rose to 5.1 percent from 4.8 percent. Over the past 12 months, wages grew 3.6 percent, slowing from about 4 percent growth early last year.

Job security is key to consumers ' willingness to spend, and amid the persistently dreary news many are taking drastic measures.

Nicely, who doesn 't have any credit-card debt, is so unsettled by the softening job market that she is also now working as a cocktail waitress. With food costs soaring, she eats almost everything in her pantry and fridge before going back to the grocery store.

Given such anxiety, Corlett says, retailers need to reassure consumers that shopping at their stores makes "smart use of their money. "

Thrift stores popular

Thrift stores across the country are seeing a surge in business as shoppers shift to buying used clothes or selling items from their closets to get extra cash. Buffalo Exchange, a second-hand clothing chain based in Tucson, Ariz., reported a 17 percent rise in sales at established stores so far this year -- the biggest gain since the late 1980s, according to owner Kerstin Block.

Trend analyst Faith Popcorn, founder of the consulting firm BrainReserve, sees the "stripping down " trend as positive.

"I think we are going back to the '50s decade, " said Popcorn, who expects consumers will start growing food in their own gardens and learn to extend the life of worn garments by mending them.

Such a picture offers less comfort to Angela Durepo of Cincinnati, who said she has cut back on buying clothes as higher gas and food prices consume more of her income.

"I 'm also not going to the movies as much or buying CDs and other kinds of extras, " the legal secretary said. "I 'm mostly shopping for groceries, hygiene products, gas for the car -- things you have to have. "

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