Personal Finance

Middle class caught in spending squeeze

Jason Prosser picks up his son Zachary, 3, from day care last week, in SeaTac, Wash. Prosser and his wife are one of many middle-class couples struggling with accelerating costs for critical services such as health care and housing.
Jason Prosser picks up his son Zachary, 3, from day care last week, in SeaTac, Wash. Prosser and his wife are one of many middle-class couples struggling with accelerating costs for critical services such as health care and housing. AP

Squeezed between flat wages and rising prices, many middle-class consumers are feeling poor.

The recession forced many people to change their ways as nearly 9 million Americans lost their jobs and home foreclosures hit record highs.

As a result, many stuck their credit cards in a drawer, cut back on spending and hunkered down.

Now, five years after the recession ended, the economy appears to be improving, but middle-class consumers still haven’t bounced back.

In fact, a recent Federal Reserve report found that more than a third of American households say they’re worse off now than in 2008, and nearly 40 percent said they’re “just getting by” or struggling to do so.

Rampant spending isn’t dead, but today’s consumer is more prudent, looking for ways to save money, buying cheaper brands and spending a larger share of income on necessities. Midyear retail sales were so disappointing that many national retailers lowered expectations for the rest of 2014.

“We really are a little bit scared — memories of how catastrophic it was and how much worse it could have been in 2007-2008,” said James Roberts, a marketing professor at Baylor University who has studied consumer behavior for 25 years. “I think we all still see an economy that we don’t trust — that the other shoe’s going to drop.”

That’s how 25-year-old Dallas resident Marty Martinez feels.

“In terms of spending, I have really reeled it all the way back because I don’t know what the future will hold for me,” said Martinez, who launched a digital marketing business in February. “Starting your own business, there’s always uncertainty. I rarely buy anything that’s full price.”

He estimates his annual income will be about $40,000 this year. Martinez plans to drive his 2002 Honda Civic “into the ground” to delay having a car payment on top of his student loan payment of $475 a month.

Consumer spending drives the economy, accounting for nearly 70 percent of the nation’s economic output. So if more people live within their means, like Martinez, that’s not necessarily good for the economy. Some policymakers and economists worry that changing consumer spending patterns could slow economic growth at a crucial time.

IN A RUT

The middle class matters because it’s such a large group — estimated to make up nearly two-thirds of U.S. households. There is no single definition of the middle class, but one measure says it’s household income of about $40,000 to roughly $100,000. Other estimates place the top income higher.

“Families are not feeling that they’re getting ahead,” said Elise Gould, a labor market economist for the Economic Policy Institute in Washington, D.C. “During and since the Great Recession, we’ve seen wages have been flat or falling. That’s a serious problem.”

Most Americans have seen their incomes shrink since the end of the recession in mid-2009 and even farther back.

“Middle-class household incomes, adjusted for inflation, are down significantly from five years ago,” said Gordon Green, a former U.S. Census Bureau official who is a partner in Maryland-based Sentier Research. “If people’s incomes are significantly lower than where they were five years ago, they don’t have the same buying power.”

NECESSITIES

Consumer spending dipped last year — the first decline in three years — as families cut back on clothing, entertainment, restaurants and charitable contributions, according to government data released last week. Consumers spent an average of $51,100 last year, compared with $51,442 in 2012.

It’s not just a question of spending, but what kind of spending. A larger share of consumers’ wallets today goes toward necessities like food, transportation and healthcare.

From 2009 to 2012, Americans’ spending rose 21 percent for eggs, 19 percent for medical supplies and 26 percent on new cars. Some of the increase could be due to higher prices on certain items, such as milk and meat; aging baby boomers needing more medical care; and persistently high energy costs.

“We’re seeing some shifting of spending,” said Baylor’s Roberts, who wrote the book Shiny Objects: Why We Spend Money We Don’t Have in Search of Happiness We Can’t Buy. For example, sales of durable goods and autos are up this year because consumers “put off buying that refrigerator” due to previous job uncertainty, he said.

This shift in spending began about 20 years ago and has accelerated in the last decade as more people move toward a lifestyle based less on reckless spending and more on value.

TEMPORARY BLIP?

Experts disagree on whether the U.S. consumer is forever changed, which could lead to longer-term economic issues, or if this is a temporary blip in commercialism.

Chris Christopher Jr., director of consumer economics for IHS Global Insight, is still counting on consumer spending to drive the bulk of future economic growth. He expects consumer spending to grow in the next two years.

Policymakers think job growth is the best way to spur consumer spending and economic growth.

But the Economic Policy Institute’s Gould says job growth without wage growth isn’t enough.

“We need to help regular people see wage growth,” Gould said. “The answers are there. In states that increased their minimum wage in early 2014, wages actually rose slightly. Policy can matter. None of this is inevitable.”

The U.S. minimum wage is $7.25 an hour, or about $15,000 a year. President Barack Obama has been pushing Congress to catch up to 13 states and some cities that have raised their minimum wage to as much as $15 an hour.

John Doggett, a senior lecturer in management at the University of Texas at Austin, sees more of a longer-lasting impact.

“This most recent recession was the deepest and longest” since the Great Depression, he said. “People feel that. I think we’re looking at a midterm to long-term permanent shift in consumer behavior.”

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