A Crisis of Consumer Confidence

Consumer frugality amid hard times sends retailers scrambling.

Jan. 25, 2009 — -- The days of consumers lining up to purchase $600 cell phones, buying expensive luxury vehicles and maintaining savings accounts in the red have given way to a time when consumers are interested more in saving than spending.

"Consumers have been spending beyond their income for 25 years, and they could do it because they could borrow," said Mark Zandi, chief economist for Moody's Economy.com. "That's over."

Consumer confidence drives the American economy, and some economists had hoped the nation could spend its way out of the recession. But that's not happening this time, in part because consumer confidence is at its lowest point since experts started measuring it.

In fact, 62 percent of Americans believe the economy will get worse, according to an ABC News consumer confidence poll from Jan. 19.

It's not just those with job woes who are cutting back. People with job security have slashed personal spending, too.

Members of the Gilbert family, who maintain a car dealership in Doylestown, Pa., say they've ditched the annual ski trip this year and have opted for fewer pizza nights because they are "petrified" about what's going to happen with the economy.

That type of frugality at every income level is killing retailers, who in turn cut orders. That makes their suppliers cut jobs and helps usher the nation into a deeper recession.

Experts say the long-term fix is that consumer confidence must rebound, but in the short term, retailers are slashing prices to fix the problem.

Rolling Back Prices

Wal-Mart chief marketing officer Steve Quinn said the company is pushing value for the buck.

"What we promise people is that they will save money if they shop at Wal-Mart," he said.

The store has the items people are buying such as bakeware and flat-screen televisions."Families are cocooning more, they're spending more time in the home," Quinn said.

But cheap TVs and drastic sales won't be enough to woo consumers storeside and to turn the economy around. Consumers need to feel secure.

"If you lose faith, then you're in recession. And if you panic, you're in depression. And we're somewhere between recession and depression at this point, and that's why it's so important for policymakers to act very aggressively — boldly — consistently — to shore up confidence," Zandi said.

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