Value Nation: Say Goodbye to Excess

When Americans don't spend, retailers flop and the U.S. economy sinks deeper.

ByABC News
January 16, 2009, 1:40 PM

Jan. 16, 2008— -- It wasn't all that long ago that Americans lined up around the block to buy a $600 i-Phone. Hummers crowded the highway. Consumers in this country were spending more than they earned.

How times have changed.

In just a matter of months, consumers went from a negative savings rate to saving an estimated 5 percent of their incomes. It may not sound huge, but in economic terms, that's a dramatic change in behavior.

"Consumers have been spending beyond their income for 25 years," said Mark Zandi, chief economist at Moody's "They could do it, because they could borrow and also because their nest eggs were getting bigger, because of rising stock and house prices. That's over."

The third quarter of 2008 saw the worst drop in consumer spending since 1980. And consumer confidence is abysmal. This week's ABC Consumer Comfort Index finds 94 percent of Americans say the economy is in bad shape, matching the record high in 23 years of weekly polls. Only 26 percent of Americans polled call this a good time to spend money.

And it's not just those who are unemployed who aren't spending. It's people with steady jobs too.

Chris and Beth Gilbert have an old stone home on a treelined street in Doylestown, Pa. They both have stable jobs working for their family car dealership business. But even they are cutting back.

"We are petrified. Absolutely petrified with what is going to happen," said Beth Gilbert.

"We are both in the car business, and the prediction for the car business is not getting any better," Chris Gilbert said.

The Gilberts have made up a new family budget, with fewer pizza nights, and no annual ski trip. The frugality at every income level sets off a brutal chain: The cutback in spending is killing retailers, who in turn cut orders, forcing their suppliers to cut jobs, sinking the economy deeper into a recession.

What's the fix? Businesses are focusing on where consumers will spend, lowering prices until consumer confidence grows. But experts say that won't happen without massive government help.