How the Newly Prudent Consumer Is Killing the Economy

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Today’s consumers are increasingly likely to pay off credit card bills in full, skip vacations, dine out less, hold off on buying big-ticket items like new cars, and even trim everyday expenses by, say, subbing a generic cereal for Kellogg’s Corn Flakes. They’re avoiding debt like the plague, and because consumer spending accounts for 70% of economic activity in the U.S., the widespread scaling back by consumers is seriously hampering the economy’s recovery. The irony, of course, is that consumers are scared to spend because the economy is so shaky, and a prime reason the economy is so shaky is that consumers are too scared to return to the spending habits of five years ago.

It has been suggested that, for the good of the economy, you should spend money you don’t have. Our economy works best, you see, if there is a multitude of free spenders—even better, a multitude of free spenders who buy early and often, and who buy things they don’t really need. From the individual point of view, this is madness, a recipe for debt disaster and years of regret and anguish.

While it is prudent for the individual to save more and scale back on consumption, the consensus is that collectively, we need to spend to get the economy humming along once more. If the masses were to exhibit boring, responsible, debt-averse consumer behavior for a sustained period of time, that would be a recipe for continued economic strife.

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There have occasionally been signs that consumers are inching back to their free-spending ways. Consumer spending rose slightly in July, and saving dropped slightly—to 5% of income, versus 5.5% in June. But you could argue that consumers are saving less because savings accounts and CDs are paying off next to nothing in interest. And it’s arguable that, despite July’s slight rise in spending, American consumers are in the midst of a much broader, longer-term retreat from spending.

USA Today describes the approach taken by many as one of “permanent cutback mode,” in which recession-scarred (and scared) consumers have dramatically changed their ways. They’re cooking meals at home rather than eating out five nights a week. They’re paying off their homes as quickly as possible. They’re shopping far more carefully compared to a few years ago, buying more for needs than wants, and are only using credit cards if they know they can pay off the bill in full and on time:

Consumers increasingly view credit cards as a convenient way to pay for items and earn rewards, rather than as a source of short-term loans, says Silvio Tavares, vice president for First Data.

“There is a fundamental difference in how people are using credit cards,” compared with the period before the recession, Tavares says.

This approach especially makes sense given the precariousness of the job market: It particularly behooves you to avoid unnecessary debt when you’re unsure whether or not you’ll have a job next week. A Washington Post piece published earlier this week focuses on consumer fears, which are driven largely by the lackluster jobs situation:

Americans are still spooked.

More than two years after the recession’s official end, people are driving their cars a year longer, holding back on jewelry and furniture, and swapping brand names for cheaper store brands at the supermarket.

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Even if they have jobs, people are pessimistic about the prospects of their incomes rising. For three decades, a survey has asked consumers “By about what percent do you expect your income to increase during the next 12 months?” The most recent results reveal that the typical worker isn’t expecting much:

In the early 1980s, respondents estimated that they would make about 4 to 5 percent more in the coming year. Over the 1990s and early in this decade, that figure dropped to about 2 percent. And then, with the recession, it dropped to nearly zero, where it has remained.

Thus far in August, there has been a sharp deterioration in consumer confidence, with ratings reaching their lowest point in two years. The jobs market is a big part of what’s fueling the drop in confidence:

Consumers’ views on jobs, in particular, have become more pessimistic. Those claiming that jobs are “hard to get” increased to 49.1 percent from 44.8 percent, while those stating jobs are “plentiful” declined to 4.7 percent from 5.1 percent.

Those anticipating more jobs in the months ahead decreased to 11.4 percent from 16.9 percent, while those expecting fewer jobs increased to 31.5 percent from 22.2 percent. The proportion of consumers anticipating an increase in their incomes dropped to 14.3 percent from 15.9 percent.

Pessimism about jobs and the economy translates into consumer behavior that’s dramatically different than the spend-free days circa 2007. A just-released survey conducted by Hart Research Associates on the behalf of Citigroup demonstrates how jittery consumers have scaled back as a coping mechanism to deal with larger uncertainties, with findings such as:

• 41% of Americans are worried about the amount they pay for necessities like food and gasoline, up 18 points from September 2010

• 28% of Americans say they are concerned about the cost of health care and 21% are concerned about the security of their retirement accounts

• 44% are shopping more at bulk food stores and 62% are cutting back on premium products in favor of less expensive options

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The Catch-22, chicken-egg predicament we now have on our hands is this: One of the main reasons the jobs market is so poor is weak consumer spending, and consumer spending is weak partly because the jobs market is so darn poor. As a result, the economy has pretty much been going nowhere. It doesn’t really matter whether freaked-out consumers first started hampering the economic recovery, or the uncertain economy began freaking out consumers. The result is that we’re getting closer to a double-dip recession, as one expert told the Washington Post:

“The trouble is people are so shellshocked and haven’t really gotten over the recession,” [Mark Zandi, chief economist for Moody’s Analytics] said. “They’re extraordinarily nervous, and when anything goes off script even a little bit they freeze, and that’s where we are right now and why we are so close to recession.”

But, in light of the past two years and still-high unemployment rates, can you really blame consumers for being shell-shocked and nervous? The economy isn’t in trouble because consumers refuse to spend more. The problem is that jobs aren’t plentiful, stable, and well-paid enough to allow consumers to spend more without digging themselves deeply into debt.

American consumers aren’t trying to kill the economy, and they’re not acting simply out of irrational fear. They’re just behaving sensibly.

Brad Tuttle is a reporter at TIME. Find him on Twitter at @bradrtuttle. You can also continue the discussion on TIME’s Facebook page and on Twitter at @TIME.