Waiting for the spending spree to begin

The Baltimore Sun

I was talking to a friend who is a travel agent, making plans to visit my son and his new wife this spring at their new Marine Corps duty station in California, and I asked if I should hold off buying my plane tickets in hopes that the prices will fall further.

My friend said she'd watch prices for me but that I shouldn't wait too long. Prices will rise with demand, she said, and by spring she expected people to be traveling again. "We are going to be tired of saying we are poor," she predicted.

That's exactly what I'd been thinking. By spring, we will have grown tired of hoarding our cash, tired of being afraid to spend, tired of feeling poor.

Like the diet that began with a New Year's resolution, our new frugality will grow boring. We'll cease to feel righteous and we'll start to feel deprived.

People hunker down in winter during the best of times. But as soon as the weather breaks and the daffodils begin to bloom, I predicted, all our pent-up demand, as the economists call it, will burst forth and lift the economy out of this terrible recession.

Turns out, I am being much too Pollyannaish about this.

Our savings have shrunk to shocking levels. Our houses aren't worth near what we thought they were. And we all know somebody who has been laid off, furloughed or had their wages frozen. Whatever our financial goals were - a new car, a house, college for the kids or retirement - we are moving backward.

"It is hard to imagine consumers going on any kind of a spending spree in this environment," said Scott Hoyt, consumer economist at Moody's Economy.com.

In 2001, after the terrorist attacks, consumers didn't recognize they were in a recession, Hoyt said, and they kept right on borrowing and spending. "Consumers saved us with their spending." That recession was mercifully short and mild as a result.

Not this time. This time we all know what's going on, and we are all worried.

"The economy is still shedding jobs at an alarming rate," said Julia Coronado, senior U.S. economist for Barclays Capital. "And that is going to keep consumers on the sidelines. Right now, we are extremely risk-averse."

There is another reason why we are holding onto our wallets - the reason I haven't bought my plane tickets yet: We expect prices will fall further. That's deflation, and it isn't the opposite of inflation in the sense that one is good and the other is bad. Both are bad.

Retail stores are expected to cut prices on spring merchandise as soon as it hits the shelves - anything to attract customers - and while that might be good news for anyone who wants a new outfit for the season, it isn't good news for the economy. As long as prices keep falling, consumers will keep waiting for them to fall further.

There is hope, however.

"We can't lose sight of the fact that we've been in this recession for so long, and that means pent-up demand has been building for 14 months,' said Michael P. Niemira, director of research at the International Council of Shopping Centers.

Not only are our clothes looking a little ratty after 14 months, but how much longer am I willing to duct-tape the vegetable bins in my refrigerator before I break down and buy a new one? Apparel sales won't rescue this economy, but the sale of big-ticket items might.

"Ultimately, if the economy has even a whiff of getting better, you will see stronger spending," said Niemira. "But that may not come until the second half of the year."

(I sometimes think that we should handle this recession the way it was suggested that Richard Nixon handle Vietnam. Just declare victory, and everyone will start spending again. Pouring money into bridges and science research is fine, but this is a consumer economy. I keep wondering why we don't just give every American a big slice of the $800 billion stimulus package and be done with it.)

Another reason for hope? Consumers have very short memories. As soon as the pain of this recession recedes, we will be back to our old profligate ways.

"There are people out there who take the longer term view that consumers have learned their lessons and they will never spend at the pace they have the past few years," said Niemira. "The reality is, if you give the consumer money, they will spend it."

"We do have a track record of remarkable short-term memory loss," said Coronado. "But what we are in right now is definitely a much worse cycle than we have been in before.

"It will keep consumers cautious for longer."

OK. Maybe we won't emerge from this crisis with the daffodils.

But I'm sure things will have improved by the time the leaves begin to turn. I'm sure of it.

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