WASHINGTON — The nation's economy has shifted into reverse amid a staggering drop in consumer spending, the government reported. But that's hardly news to furniture-store owner Chris Horn of Monterey Park.
Horn's store saw business plummet 40% last month, when the financial crisis escalated and stocks plunged.
"Business was pretty steady up until then, but then it dropped off drastically," said Horn, 58, the third-generation owner of Divine's Furniture, which specializes in vintage pieces. "Customers are very reluctant to spend any money right now."
Consumers stepped on the spending brakes so hard, in fact, that the nation's gross domestic product shrank 0.3% in the three months ended Sept. 30, the Commerce Department estimated Thursday.
That was the deepest decline in economic demand since 2001. Moreover, most economists believe it will be the first of at least two consecutive quarters of decline in GDP -- a widely accepted, if unofficial, definition of recession.
In total, personal consumption declined 3.1% in the third quarter, the Commerce Department said. It was the first time since 1991 that consumer spending dropped outright and was the biggest such decline since 1980.
The belt-tightening was led by a 14.1% drop in spending on big-ticket items such as cars and appliances and a 6.4% decline in smaller purchases.
Though the drop-off in consumer spending is bad for the economy, there's at least one positive aspect: It means that more Americans have finally stopped living beyond their means, said Dean Baker, co-founder of the Center for Economic and Policy Research in Washington.
Baker noted that since the 1990s, consumers have been spending more than they should, because the tech-stock bubble and then the housing bubble of the last few years made them feel wealthier than they really were.
"When housing prices go through the roof, people consume more when they see there is more wealth in their homes. And they don't save because they think their home is doing it for them," Baker said.
Until the 1990s, households had a savings rate of about 8% a year. That declined to 2% by 2000 and has mostly stayed below 1% since 2004, including 401(k)s and pension funds, Baker said.
That means many people do not have enough savings to fund their retirement or a safety net if they lose their jobs.
