Spending less could make recession a “self-fulfilling prophecy”: Analysts

September 20, 2011

Mark and Kathy Swezy of Englewood, Colorado embody what many Americans would call a rock-solid work ethic. Mark is a full-time purchasing manager at JoaQuin Manufacturing, while Kathy splits her time between her own graphic design business and a job at Nosh Nest, a high-end cookware and food shop in downtown Denver, Colorado.

Yet to hear Kathy Swezy tell it, the last two months have meant belt tightening on top of more belt tightening. “Over the last 60 days it’s been a little bit better, because I’m starting to get more graphic design work — but I really had to cut my rates, too,” she says. “So I’ve been buying school clothes at thrift stores, I’m using outdated software,and basically we don’t go out to dinner much at all.”

The Swezys reflect in their behavior what analysts are seeing across a large swath of the American economy. According to Bankrate.com’s September Financial Security Index, 40 percent of Americans have reduced their spending in the past 60 days, a condition that Bankrate senior financial analyst Greg McBride believes could pave the way for another recession.

“That sort of cutback of spending, if sustained for any length of time, would make a recession a self-fulfilling prophecy,” McBride says. “August was in many ways a perfect storm: We had a barrage of poor economic data, a downgrade to the U.S. credit rating, the fiasco over the debt ceiling and a stock market correction. And Europe has been an ongoing issue as well.”

All of that has led to deteriorating financial security among American consumers, who only make things worse when they spend less. “Seventy percent of economic output comes from consumer spending, and any sort of cutback can ripple through the economy very quickly,” McBride says.

Just in case you think McBride’s fishing for headlines, his words are more or less echoed by Clifford L. Caplan, founder and president of Neponset Valley Financial Partners in Norwood, Massachusetts. “With the lukewarm domestic economy, high unemployment and continued problems in housing, few — including myself — see a silver lining to the current malaise,” he says. “Obviously if this reduction in consumer spending continues, the U.S. economy will slide back into recession.”

As for holding out on hope, “Consumers are now shopping in the present tense,” says Jean Chatzky, a New York-based financial expert and author of “Money 911.” “What this environment has taught consumers — for better or for worse, and from my perspective it’s for worse — is that there is no good way to plan for the long term. So when the Dow has a good day or week, they open their wallets. And when there’s more bad economic news from Greece or France or Italy, they close them tight.”

Or, they turn to alternative ways of raising revenue and paying for things. Where in past years Kathryn Swezy would’ve easily funded her side career as a musician out of her own pocket, this year she turned to Kickstarter.com, a “crowdfunding” website, to raise $1,005 in startup capital for her “Little Seasons” CD.  When she wants a night out with her husband, she reviews the restaurant for A Closer Look, which pays for the meal.

“We could always count on raises in the past, but we can’t count on that now,” Swezy says. “And as the one doing the grocery shopping, I’ve had to be a lot more responsible.”

The spending retreats seen in Bankrate’s latest data — which surveyed 1,001 U.S. adults — touched all income levels: 37 percent of the highest-income households ($75,000+) cut back, compared to 43 percent in the lowest-income households (under $30,000). And among those age 30 and up, more Americans reported lower net worth than higher net worth compared to last year.

What’s more, the government may have hit the wall in terms of what it can do to bolster consumer confidence. “The Federal Reserve keeps pushing interest rates lower and lower but it’s like pushing on a string,” McBride says. “The demand is not there.”

Some relief could come when the government releases its third-quarter statistics on economic growth in October, but no one’s holding their breath: Retail and job growth have remained flat thus far, with no hints of a sharp uptick in the cards. In the meantime, experts say we can expect uncertainty to prevail, except on one front. As Chatzky sums it, “Consumers have learned that they have little choice but to control what they can control. They can’t control the news or the markets but they can, in the short term, control what to do with their spending. That’s how they exercise their power.”

Call it Bootstrap Power, if you will. “I’m a hopeful person by nature so I hope things get better—and I think they will,” Swezy says. “But I plan to keep up this kind of discipline, and to keep the bootstraps tight for a while longer.”


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Spending less could make recession a “self-fulfilling prophecy” – true. However, spending more could make defaulting on the resulting debts more likely.

Thus, finally, the U.S. and world economies find themselves at a crossroads, and no one is really sure which direction to go.

Mr. Dick Turpin

Posted by Dickturpin | Report as abusive

“So I’ve been buying school clothes at thrift stores, I’m using outdated software,and basically we don’t go out to dinner much at all.”

This comment is hilarious. The Swezy children are too good for used clothes? Her graphics work is so complicated that it absolutely requires Photoshop CS5 instead of CS3? Why go out to dinner when cooking at home is almost always more affordable?

This kind of mindset – I want the newest products, the latest fashion, I want to pay someone else to cook my meal and wash my dishes – is the very thing that got many Americans into their current financial mess.

I guess it’s that old American dream, that old optimism, refusing to die, but incapable of surviving without life support. We think we can have everything we want, cheaply and instantly. But times are changing. You just have to give up that old-school lifestyle mentality. Everyone should be thrifting, cooking, and trying to get by with last year’s revision of Photoshop (the horror!). Everyone should save money whenever they can. Our darkest days may still be ahead of us.

Posted by Nullcorp | Report as abusive

10,000 boomers turning 60 every day folks-expect less spending and less risk taking from seniors for decades! We might want to think about how were going to fund the unfunded $50+ trillion we owe boomers too-when we get a minute! Spend/gamble our way out-snowballs chance in h#ll!

Posted by DrJJJJ | Report as abusive

FYI: Baby boomers account for 1/4 of the US population (80 million) and much of the wealth! 50% of HS student are not graduating from High School! Going to be tuff to knock off the $50 Trillion on a hambuger flippers wage FYI!

Posted by DrJJJJ | Report as abusive

Where is the money coming from after all?

Productive work on new jobs?

Posted by robb1 | Report as abusive

The boomers’ money have been already spent, the boomers just don’t know it yet…

Posted by Ananke | Report as abusive