U.S. enters era of cautious spending

By Kevin G. Hall

Star-Telegram Washington bureau

WASHINGTON -- After several years in the wilderness, the American consumer is back.

Well, sort of.

Several economic indicators point to an increase in consumption, suggesting that the consumer, who drives much of the economy, is willing to loosen the purse strings.

Banks report more requests for credit.

Car sales are surging. The fortunes of many retailers are improving.

Less clear is to what degree Americans will be willing to take on more debt and spend more freely.

The psychological scars left by the financial crisis of 2008 and the Great Recession remain.

"Part of this story, beyond this month or this quarter, is the new austerity within the consumer market -- both paying off debt and building up savings. That's not going to go away," said Ken Goldstein, an economist with the Conference Board, a New York research group. "It may ease up a bit, but we're not going back to pre-Great Recession. That world is done."

Before the recession, consumption accounted for about two-thirds of economic activity. Almost a decade of easy lending led consumers to buy more house than they thought possible, borrow heavily against their homes, rack up credit card debt and live beyond their means.

The recession brought that to a halt. It forced consumers and businesses to pay down debts, sometimes referred to as deleveraging.

That's a fancy way of saying consumers worked to lower their debt service ratios, or the percentage of disposable income that's gobbled up by repaying loans.

Here's where that stands. Federal Reserve data show that in the third quarter of 2007, the peak of indebtedness, consumers had a debt service ratio of 14.08 percent. Think of it as $14.08 of every $100 going to pay off debt.

In the same quarter of 2012, that ratio had fallen to 10.61 percent. Consumers have been shedding debt like a bad habit. That's good for personal finances but not so good for an economy driven by consumption.

"The wounds of 2008 and 2009 may be four or five years ago, but they're still fresh. There are still many people unemployed or underemployed," said Susan Reda, the editor of STORES, a trade magazine for retailers. "We've turned a corner, but they don't think they're on easy street."

Retail sales are unlikely to revisit the go-go days of 2003 or 2004, because consumers still face job insecurity and general angst about the nation's direction. The expiration Dec. 31 of the payroll tax holiday means that all workers are giving Uncle Sam a greater share of their earnings. The ongoing tax and spending battle also dampens consumer sentiment.

On the plus side are a bull market for stocks and rising home prices in much of the nation. Both make some parts of the population feel wealthier, at least on paper, and boost consumer confidence.

That psychological benefit runs up against changes in lending, however. Banks require bigger down payments for houses, and homeowners can no longer freely borrow against their home equity.

"I definitely think the results of the recession will change the habits of consumers, because they won't be able to borrow as freely as they did 10 years ago," said Jack Kleinhenz, the chief economist for the National Retail Federation, representing chain stores.

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