Consumers cut back; retailers feeling pinch

Saturday, August 26, 2006 Americans are learning to live without frills as gasoline and utility costs soar. ST. LOUIS (AP) — Fresh evidence shows that high energy prices and sagging home values are pinching the main driver of the U.S. economy — the Average Joe's wallet. Retailers and economists say many Americans are waiting to buy big-ticket items and cutting back on frills. Homeowners are shelving plans to remodel kitchens. Families are dining out less and tightening their budgets. "People are taking funds from one area and committing them to another, gasoline and utilities in particular," said Gregory Miller, chief economist at Sun Trust Bank Inc. He predicts growth in consumer spending will fall from a rate of 2.5 percent to around 1.5 percent during the second half of this year, bringing down overall economic growth at the same rate. At the same time, homeowners are seeing a key source of their wealth lose value as housing prices fall in some parts of the country. Psychologically, this creates the opposite of the "wealth effect" that kept upbeat consumers spending as stock prices rose in the late 1990s and real estate boomed after the recession in 2001, said Robert Weagley, chairman of the personal financial planning department at the University of Missouri. Home sales drop The Commerce Department reported Thursday that new home sales fell 4.3 percent last month, while the inventory of unsold homes on the market rose to a record high and median home prices slipped between June and July. At the same time, orders for durable goods such as cars or expensive appliances dropped 2.4 percent in July. That reflects what economists say is consumers' hesitation to buy big-ticket items in a tighter economic environment. Several retailers have warned that the change in consumer behavior was hurting sales and have seen their stock prices slide as a result. Home improvement chain Lowe's Cos. warned Monday the slowing housing market will hurt its earnings for the rest of the year; its stock tumbled 10 percent this week. Shares in Williams-Sonoma Inc. fell to a new 52-week low Thursday after the home furnishings retailer cut full-year guidance because of the slowing economy. Gasoline price effect More than half of U.S. households said gasoline prices, which have averaged $3 a gallon in some parts of the nation, caused them to cut back on discretionary spending during August, according to a survey released Tuesday by the International Council of Shopping Centers. Miller and others say gas prices don't seem likely to drop significantly. Meanwhile this week's housing numbers show that the real estate market is likely to decline further as the number of unsold homes grows, further pressuring prices downward. "I rarely find myself in a position where a single data release really snaps my head around," Miller said. "I'm beginning to question my assumption that this housing correction will continue to occur in a controlled fashion." So what does that mean for a small-business owner like Beth Ruppel? Leftover yogurt-dipped dog treats. Ruppel owns Wolfgang's Pet Stop in St. Louis. Customers still bring their dogs in for grooming, but they're passing on homemade treats or faux-pearl dog collars in the gift shop upstairs, she said. "Customers are still buying what they need," Ruppel said. "But they're not buying the accessories and the other items that are not necessarily practical."