Crisis hits home as consumers curb their spending

Cowed by the financial crisis, American consumers are pulling back on their spending, all but guaranteeing that the economic situation will get worse before it gets better.

In response to the falling value of their homes and high gasoline prices, Americans have become more frugal all year. But in recent weeks, as the financial crisis reverberated from Wall Street to Washington, consumers appear to have cut back sharply. Even with the government beginning a giant bailout of the financial system, their confidence may have been too shaken to resume free-spending any time soon.

Recent figures from companies, and interviews across the country, show that automobile sales are plummeting, airline traffic is dropping, restaurant chains are struggling to fill tables, customers are sparse in stores - and even gamblers are cutting back.

When the final tally is in, consumer spending for the quarter just ended will almost certainly shrink, the first quarterly decline in nearly two decades. Many economists, who began the third quarter expecting modest growth, now believe the cutbacks are so severe that the overall economy did not expand either, and they warn that a consumer-led recession could be more severe than the relatively mild one earlier this decade.

"The last few days have devastated the American consumer," said Walter Loeb, president of Loeb Associates, a consultancy, who said he worried that the constant drumbeat of negative news about the economy was becoming a self-fulfilling prophecy. "They all feel poor."

For some Americans, the pain is already acute: Jobs disappeared at a faster clip in September. For many others, day-to-day finances are fine for now, but the financial outlook is uncertain: 401(k) accounts are dwindling, loans are hard to get, and house prices continue to fall.

Consumer spending, which accounts for nearly two-thirds of the economy, grew modestly earlier in the year but fell in July and August on an annualized rate. When the government releases quarterly numbers later this month, they are expected to show that consumer spending shrank 3 percent or more. That would be the first quarterly decline since 1990, ahead of the 1991 recession, and the steepest since 1981.

According to interviews with shoppers, analysts, and company executives, the impact of the financial news of the last two weeks has been palpable in many corners of the country, from car dealerships, which endured the worst month for sales in 15 years, to the flashy casinos of Las Vegas, where spending at luxury restaurants and stores and at gambling tables has gone from bad to worse.

The picture is just as grim at suburban malls and city boutiques, where traffic is disappearing as retailers brace for what many predict will be a dismal holiday shopping season. Some have responded by reducing the number of salespeople or their hours even before the season gets rolling.

At a retail conference in New York on Thursday, Michael W. Rayden, chairman and chief executive of Tween Brands, which owns the Limited Too and Justice chains, spoke about consumer fears. "As I travel around the country and listen to moms and little girls, it is amazing how much even these 10-year-old girls are aware that something is going on," he said. "Mom is saying, `I can't afford that.' "

Consumers are cutting back on air travel and hotel stays, whether for business or pleasure.

"Consumers have become quite concerned that the recession, which they think is already underway, will last longer than they anticipated and will be deeper," said Richard Curtin, director of the Reuters-University of Michigan Surveys of Consumers. "They see their worst fears coming true."