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Americans, economy feel ripple effect from drop in spending

Consumer fears that things may get worse and concern over having enough in the bank are part of the reason the U.S. is in so much trouble today and faces the prospect of more pain in the years ahead.

August 16, 2011|By Faye Fiore and Don Lee, Los Angeles Times
  • Consumer confidence tanked in early August to levels even lower than during the recession.
Consumer confidence tanked in early August to levels even lower than during… (Spencer Platt / Getty Images )

Reporting from Leesburg, Va., and Washington — Barbara Ott works three days a week at a jewelry store in the heart of historic Leesburg. Her husband is in business development. Their two children are grown and their income is about as high as it's ever been.

They figured that with the kids launched they'd be eating out more. Not so — only about twice a month these days. Vacation? Not this year. And the new upstairs carpeting will have to wait.

Nothing says they can't indulge a little the way they had dreamed — except the feeling that things are bad and about to get worse. Their 401(k) got whacked. Will there be enough for retirement? They would rather save it than spend it.

"Do I spend what I used to? Absolutely not," said Ott, 57.

The Otts and hundreds of thousands of American families like them represent one of the biggest reasons the economy is in so much trouble today and faces the prospect of more pain in the years ahead.

The tiny ripples caused by cutbacks from Americans closing their wallets have built to a tsunami for a national economy that is overwhelmingly dependent on consumer spending.

Consumer confidence was growing at the start of the year but turned in the spring as oil prices spiked, job growth fell off and home prices sagged. And the public's mood has only darkened since with the political turmoil over the debt ceiling, the downgrading of U.S. debt by Standard & Poor's and the volatile stock markets.

Based on the latest survey by the University of Michigan, released Friday, consumer confidence tanked in early August to levels even lower than during the recession. There were widening fears about the conditions, but people's expectations for the future were the gloomiest since 1980.

And in June, the most recent data available, spending shrank — by 0.2% — for the first time since the fall of 2009. Rather than hit the stores, government data show, more families were squirreling away more money.

But analysts and merchants haven't given up on the American consumer. For one thing, many figure that people can't keep holding off on buying or replacing basic needs. The average car on U.S. roads, for example, now is more than 10.6 years old. Many homeowners are making do with clanking washing machines and dishwashers.

In one sign of pent-up demand, even amid the dreary consumer sentiment, the Commerce Department said Friday that retail sales in July edged up 0.5% from June. Sales rose for cars, appliances and clothes.

Still, if middle-class incomes don't grow, the only way consumer spending can increase is if buyers use credit cards or borrow. Consumer debt has started to rise again, but the recession and its aftermath offer grim evidence of what that kind of growth leads to.

Just a few years ago, Leesburg was the land of plenty. Four of the fastest-growing and wealthiest counties in the nation are here in Northern Virginia about an hour west of Washington, fattened by government contracts and home to well-to-do lobbyists, lawyers and consultants.

Loudoun County, where Leesburg sits, is one of those counties, set amid rolling grassland on the outskirts of the Bull Run battlefield. The median household income is $114,000. More than 80% of the residents own a house. The unemployment rate is a low 4.4% — less than half the national rate and down from 4.9% in 2010.

For most Leesburg residents, the recession did not spell hardship. Whereas people in harder-hit parts of the country had to choose between mortgage payments and food, sacrifice here meant holding off on a new living room set.

Even so, the climate of economic anxiety is palpable. One major problem is the lack of income growth. In the second quarter of this year, workers were pulling down median weekly earnings of $756, the Labor Department says.

After adjusting for inflation, that's down 1.5% from a year earlier and essentially unchanged from a decade ago, according to Labor Department numbers.

The lack of income growth in places such as Loudoun County has painful consequences for middle-class Americans everywhere whose own incomes, jobs and businesses are dependent on spending by their fellow citizens.

Lack of income growth among the more affluent has translated into trouble for scores of small service businesses and thousands of workers — including an expanding immigrant population — in construction, landscaping, retail sales and other sectors.

That trend can be seen in the case of Jim Campbell, 51, who owns a law firm in town, and his wife, Linda, who has a quaint shop that sells affordable antiques.

Their businesses suffered in the recession and though they still are among some of the highest wage earners in the country, they've cut back. No more vacation cruises. The living room furniture she had her eye won't be ordered. And when their country home on four acres — renovated three times in recent years — needs repair, they do it themselves.

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