Consumers permanently committing to thriftiness, saving
By Sandra Guy Business Reporterfirstname.lastname@example.org September 5, 2011 5:02PM
Trenton Parks talks about his spending habits in this economy. | Al Podgorski~Chicago Sun-Times
Updated: November 26, 2011 12:26AM
Trenton Parks of Naperville is watching his spending even though he’s an IT executive and the tech industry is flourishing.
He is holding onto his two eight-year-old cars, spending less on lawn care and dry cleaning, maintaining a savings account for vacations, paying off credit cards monthly, trimming his investments in his two children’s 529 college savings accounts and spending nothing extra on his home.
“I view my home now as rent rather than as an appreciating asset,” he said, adding, “I’m underwater,” meaning his home is worth less than what’s owed on it.
Parks, 40, who jokingly says he forces his wife to use coupons when she shops, is committed to keeping his family financially secure.
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Kate Mitchell, a 32-year-old Logan Square Web developer, got laid off in April after her ad agency employer closed. Even though she was hired by another agency the next day, she said she and her husband have shifted their priorities to long-term savings and paying a bit more toward their mortgage each month.
“I am putting more money into [liquid] savings and into my 401(k), and trying to be more conservative,” she said.
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Ayanna Johnson moved to a less-expensive apartment in Hyde Park two months ago to save for a down payment for a house.
“I am saving $200 a month in rent,” she said.
Recession-scarred consumers continue to clip coupons, skip expensive vacations and brown-bag their lunches, but they have reached a new stage: making larger, more permanent changes.
Americans are saving more, paying down mortgages, reducing credit card debt, moving to cheaper housing, working at unpalatable jobs and postponing retirement.
“This underscores the increasing numbers of people who believe they have to take bigger, more long-term action,” said Michelle Peluso, global consumer chief marketing and Internet officer for Citibank parent company Citigroup.
More people say the economy has changed forever how they think about and handle money. A survey done by Peter D. Hart Research Associates for Citibank shows more people believe the economic realities of life have changed foreve — 57 percent in the survey released on Aug. 31, up steadily from 51 percent nearly a year ago.
Three and a half years after the Great Recession began and in the middle of a tumultuous summer as Congress haggled over the nation’s debt crisis and the economy continued to crawl, consumer confidence plunged in August to its lowest level since April 2009. And while personal spending was up, the data show much of the increase went to pay for higher-priced gas and food.
The price of gasoline is up 35 percent — about a dollar a gallon — from a year ago.
“When you are paying $25 more a week in cash for gasoline, that’s coming right out of your income,” said Britt Beemer, president of America’s Research Group, a Charleston, S.C., analysis firm that tracks consumer spending.
According to his research, 40 percent of people are paying for goods in cash because they have no choice.
“A few years ago, 39 percent of consumers relied on credit cards. Today, that’s down to 12 percent,” Beemer said. “I’ve never seen those kinds of changes in my lifetime.”
Financial advisers are seeing more clients living within their means and growing numbers putting off retirement.
“An electrician or the guy who goes to work at a factory and who thought he could retire at 67 is now looking at working until he is 70 to 75,” said Wayne Dennis, president of Dennis and Dennis Consulting in southwest suburban Crestwood. “Even doctors who could retire at 62 are now pushing it to 70.”
He has clients who have been fired, laid off or had their hours cut while they face paying substantially higher health insurance expenses and try to rescue failing businesses and homes at risk of foreclosure. They are using their savings to pay for day-to-day bills and their children’s college educations.
Consumers are juggling these enormous challenges while working to balance their everyday budgets.
They are spending more on milk, cereals, meats, sweets and bakery products, according to the Bureau of Economic Analysis. The same data of July spending show people spending less on vacations, sports outings, the theater and membership clubs.
Paul Swinand, a stock analyst who covers retail and consumer goods for Chicago-based Morningstar, said any increase in the costs of commodities such as corn, meat, gas and cotton are especially hard-hitting for the 42 percent of Americans who say they usually or always live paycheck to paycheck.
“People may still buy small items such as shoes, handbags and inexpensive jewelry, but they are not replacing the dishwasher or the refrigerator,” Swinand said.
Ted Ganas, 27, of Park Ridge, is feeling the pinch of higher gas prices. Ganas, a real estate appraiser, was laid off in July 2008 but found a job soon afterward as a clerk at a hospital. That job offered frequent opportunities to work 90-hour weeks, which helped him to retire his $10,000 student loan debt. But he decided to take a pay cut to get back into real estate in February 2010 and is working in a still-suffering housing market.
“When gas prices go up, I cannot go out with friends as often,” Ganas said. “I play softball twice a week, and when I’m in that budget squeeze, I go home after the game.”
Government statistics show that Americans are saving more — household savings is now about 5 percent of disposable income compared with 1.2 percent in 2005. Household debt has fallen to 115 percent of disposable income, largely due to foreclosures, 15 percentage points lower than the 2007 peak of 130 percent, according to economist Laura D’Andrea Tyson, former chair of the U.S. President’s Council of Economic Advisors in the Clinton administration.
Credit card balances have been declining since the end of 2008 and now account for 6 percent of all consumer debt, according to the Federal Reserve Bank.
But long-term economizing gets tiresome, and the middle class occasionally splurges out of sheer exhaustion. While spending has skidded on gas-guzzling pleasure boats and road trips to go camping and to theaters, amusement parks and sporting events, spending on technology has increased, according to July spending data from the Bureau of Economic Analysis.
People are willing to treat themselves to select products in what Robert Johnson, director of economic analysis at Morningstar, calls the “iPad recovery.” They will buy an iPad, an iPhone and other computer equipment, as technology becomes such an integral part of everyday life.
Jeffrey Friedman, senior market strategist at MF Global, said people are willing to pay for home computers and television because they are seeking cheap entertainment.
“I can turn on the TV and pop popcorn with the kids and save money,” he said.