Watch the consumer

Big slowdown in spending could bring recession, economists say

Jacquie Valatka of Salem, shown with children Jessica (center) and Jeremy has reined in on the family's spending, looking for bargains and free activities. (Dominic Chavez/Globe Staff)

Whether the economy goes into a recession depends on people like Bernadette and James Scutti. The Arlington couple is trying to pay off a home-equity loan they took out to finance an addition on their modest Cape-style house and pay down thousands in credit-card debt.

So the Scuttis, who have three children, are cutting back on eating out, replacing recessed lighting with energy-efficient bulbs, and driving their Subaru to save on gas, leaving the Honda sport utility vehicle in their new garage.

"We are putting a lot more thought into every penny we spend," Bernadette Scutti said.

Consumer spending, which accounts for about 70 percent of US economic activity, is critical to the overall health of the economy. For years, robust spending on everything from homes to clothes kept the economy afloat. But Americans are paying heavily for their habits, saddled with record amounts of debt. Coupled with increasing concerns about rising gasoline prices, growing unemployment, and a prolonged housing slump, that may cause consumers to finally stop shopping this year. That, some economists say, would likely push the nation into a recession.

The forecasts are certainly bleak. Economists at Goldman Sachs yesterday joined those at Merrill Lynch and Morgan Stanley in predicting a recession this year. And growth in consumer spending is expected to drop to 1.9 percent from 2.9 percent in 2007, according to Nigel Gault, an economist at Global Insight in Lexington. The last time spending slowed that much was in 2001, and the only time spending growth was lower than 1.9 percent was in 1991. In both years, the country was in the middle of a recession, typically defined as two quarters of economic contraction.

"The consumer is really on the ropes," Gault said.

One of the first signs of a major slowdown in consumer spending was in stores across the country. Merchants, used to comfortable profits for the holiday season, slogged through this last one with aggressive promotions.

But that did not salvage the season for many retailers. Just days after Christmas, department store chain Macy's disclosed plans to shutter nine stores and said it expected December sales to be down by 4 to 7 percent at locations that have been open at least a year. Struggling electronics merchant CompUSA said last month it would close the entire 100-store chain. Classic clothier Talbots Inc. last week unveiled plans to eliminate 78 stores and cut its workforce by 5 percent.

Now, with merchants set to release their latest monthly sales figures in the coming days, economists and retail analysts are bracing for the worst. Although one market-research firm, ShopperTrak, yesterday reported 4.5 percent growth in holiday sales, most analysts expect more tepid results. Sales at chain stores for the week ended Dec. 29 rose just 2.3 percent from a year earlier, according to the International Council of Shopping Centers, reflecting what could be the weakest holiday season in five years. Retail stocks have taken a beating on Wall Street since the new year, with the Retail Index, which tracks the shares of the nation's largest retailers, this week reaching its lowest mark in three years.

Already, retailers are responding to the slowdown, holding back on ordering and inventory from manufacturers. Typically, retailers have purchased 85 percent of merchandise for the year by now, and many have only made commitments for 75 percent, said Marshal Cohen, chief retail analyst for NPD Group, a market research firm in Port Washington, N.Y.

"The retailers are looking to cut back on inventory and trying to manage expectations," Cohen said. "2008 is going to be a tough retail climate. Consumers are not rushing to spend on products. They're being very selective."

Meanwhile, even people without much debt and comfortable mortgages, like Jacquie Valatka, are getting anxious about the economy, cutting shopping budgets and using discretionary income for savings or slush funds in case things get worse.

As Valatka watched prices rise for everything from a gallon of gas to a gallon of milk, the Salem mother of two has reined in on the family's spending. For the holidays, she cut her gift budget 25 percent to $300 and used free items from website Freecycle.org to help make gift baskets for friends and family.

Now, she's borrowing movies from the library rather than renting them at the video store or going to movie theaters. Valatka plots the most fuel-efficient routes for running errands and looks for free activities for her children at the Peabody Essex Museum.

When she does shop, Valatka combs through weekly circulars for coupons and looks for the sale signs at stores.

Valakta, who works as a financial analyst, is nervous about the job market and works holidays and increased hours at her second job at a community pool to save for a slush fund in case of unemployment.

"With oil prices uncertain, the turmoil and war in the world, and the precariousness of the job market, I just want do what little I can to be as prepared as I can be," Valatka said.

Jenn Abelson can be reached at abelson@globe.com.