Full of Doubts, US Shoppers Cut Spending

Cowed by the financial crisis, American consumers are pulling back on their spending, all but guaranteeing that the economic situation will get worse before it gets better.

In response to the falling value of their homes and high gasoline prices, Americans have become more frugal all year. But in recent weeks, as the financial crisis reverberated from Wall Street to Washington, consumers appear to have cut back sharply. Even with the government beginning a giant bailout of the financial system, their confidence may have been too shaken for them to resume their free-spending ways any time soon.

Recent figures from companies, and interviews across the country, show that automobile sales are plummeting, airline traffic is dropping, restaurant chains are struggling to fill tables, customers are sparse in stores.

When the final tally is in, consumer spending for the quarter just ended will almost certainly shrink, the first quarterly decline in nearly two decades. Many economists, who began the third quarter expecting modest growth, now believe the cutbacks are so severe that the overall economy did not expand either, and they warn that a consumer-led recession could be more severe than the relatively mild one earlier this decade.

“The last few days have devastated the American consumer,” said Walter Loeb, president of Loeb Associates, a consultancy, who said he worried that the constant drumbeat of negative news about the economy was becoming a self-fulfilling prophecy. “They all feel poor.”

For some Americans, the pain is already acute: jobs disappeared at a faster clip in September. For many others, day-to-day finances are fine for now, but the financial outlook is uncertain: 401(k) accounts are dwindling, loans are hard to get and house prices continue to fall.

Claudia Prindiville, a 41-year-old mother of three, is among those feeling anxious. Shopping at a Talbots store in Chicago’s northwest suburbs, she said her own family’s finances had not yet suffered. Still, she pulled out a coupon to buy a two-piece sweatsuit, and at The Children’s Place she bought pants and shirts from the sale rack.

“All the talk about how bad it is out there has started getting in my head,” she said. “I still need to shop for my kids’ school clothes, but I am definitely buying less for myself.”

Consumer spending, which accounts for nearly two-thirds of the economy, grew modestly earlier in the year but fell in July and August on an annualized rate. When the government releases quarterly numbers this month, they are expected to show that consumer spending shrank 3 percent or more. That would be the first quarterly decline since 1990, ahead of the 1991 recession, and the steepest since 1981.

According to interviews with shoppers, analysts and company executives, the impact of the financial news of the last two weeks has been palpable in many corners of the country, from car dealerships, which endured the worst month for sales in 15 years, to the flashy casinos of Las Vegas, where spending at luxury restaurants and stores and at gambling tables has gone from bad to worse.

“In the last few days, there has been a huge drop-off in foot traffic and almost zero sales,” said Gil Colon, sales manager at Villa Reale, a high-end art and furniture store in Las Vegas, who has laid off five sales people in the last five months, leaving three.

"People have lost their confidence. They have no buying power. They are losing their retirements, their vacation funds, and they are scared to commit to buying anything,” he said.

The picture is just as grim at suburban malls and city boutiques, where traffic is disappearing as retailers brace for what many predict will be a dismal holiday shopping season. Some have responded by reducing the number of sales people or their hours.

Taking a break outside an Office Depot store in suburban Chicago, Dave Cargerman, a 25-year-old sales clerk, said his hours had been cut back. “We got killed during the back-to-school sales,” Mr. Cargerman said. “And that time of year is usually our bread and butter.”

Nearby, employees at Lattof Chevrolet were preparing to close the doors this month on a business that opened in 1936. It may not be the last dealership to go: the percentage of people saying they expect to buy a car in the next six months, on a three-month moving average, has fallen to 5 percent, the lowest figure since the Conference Board started asking about such plans in its consumer confidence survey, in 1967.

“We’re not selling S.U.V.’s and trucks at all,” said Raul Trejo, 24, a mechanic. “We saw it coming.”

The situation is so uncertain that some retailers are simply not even trying to estimate their sales. Pier 1 Imports and Circuit City stores recently withdrew their guidance to Wall Street about earnings and said they would not offer any more predictions this year.

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