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Apprehension Stalls Out Consumer Spending

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September 29, 2011 by   Leave a Comment

If you’re lusting for a Lexus or pining for a piano, you’re part of a big crowd. Despite a jump in July, consumer spending has slowed to a crawl, according to a report by USA Today.

“We’ve been putting off a bathroom renovation and a new car,” says Ken Whitehead, consultant for UnitedHealthcare in Franklin, Tenn. “We’ve been worried about the economy and the lack of growth that we’ve seen.”

Until consumers such as the Whiteheads start to buy the things they’re yearning for, the economy will remain mired in a slump. Consumer spending is the main engine of U.S. economic growth. “Consumers are very apprehensive and cautious in spending, and we expect that to continue,” says Diane Swonk, chief economist at Mesirow Financial.

That’s the question that politicians and economists are pondering now: What will it take to get you to open your wallet? Low interest rates haven’t helped; tax cuts haven’t, either. Raises and a better job market would be a big help, but businesses won’t start hiring until — you guessed it — spending rises. “It’s a Catch-22 situation,” says Lynn Franco, chief economist for The Conference Board.

A tenet of economics is that in a recession, people start pining for things they want, but can’t afford. That’s called pent-up consumer demand. Eventually, they save enough (or get more income) and break down and buy those things. When that happens, the recession ends.

Consider your car. Increased auto sales don’t just enrich car salesmen and car companies. There are hundreds of companies that make parts for cars, and that demand flows to them. Stepping further down the automotive food chain, increased auto sales means higher demand for raw materials, such as rubber, steel and plastics.

There’s plenty of pent-up demand for new cars. The odds are good your current car is older than your last car was when you sold it. In 2010, the latest data available, the average car on the street was 11 years old, up from 8.4 years in 1995, according to Polk, which tracks auto data. More cars were scrapped in the 15 months ended March 2010 than were sold.

Cars are better built than they used to be, which is one reason people are hanging on to them. But another is that people simply don’t feel comfortable buying a new one in the current economy. “What we’re seeing now is that consumers are more in favor of repairing an aging auto than taking on new debt,” Franco says.

Houses are the other obvious example. A new home means work for carpenters, construction workers, sawmill operators and real estate agents. But even if you buy an existing home, you’ll probably also be in the market for carpet, furniture, drapes and lawn gnomes.

Existing home sales have slowed to a trickle, although they’re remarkably affordable. The median price of existing houses relative to average employment income per worker is at its lowest since the 1970s, says John Lonski, economist for Moody’s Analytics. Mortgage rates are at levels last seen in the Truman administration.

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