Consumer Cutbacks May Hurt Economic Recovery

Sept. 16, 2011— -- As Target is selling out thrifty threads in hours and extreme couponing has become a national pastime, do we need any more evidence that being frugal is the new chic?

People are spending less on things such as cars, clothing and furniture, and there is evidence of it everywhere.

Consumer spending was down across the board in August just as it was announced that consumer confidence was its lowest level since April 2009, the Commerce Department said this week.

"The month of August was a real turning point," said Greg McBride, senior financial analyst at Bankrate.com. "We got a barrage of bad economic news. There was the debt rating downgrade, the debt ceiling fiasco and the stock market correction. Together, it all put a dent in consumer confidence, or what was left of it."

Retail giant Target's website crashed after thousands tried to get their hands on Italian designer Missoni's discount line.

"Guests came swarming into the stores and grabbed as many things as they can possibly carry," said Dustee Jenkins, the vice president of communications at Target.

Millions are using coupons -- and not just for groceries. Start-ups like Groupon and Living Social, among a myriad of like-minded companies, are offering consumers the opportunity to score even the poshest items -- like plastic surgery or Lasik eye surgery, for example -- for a hefty percentage off.

There are even applications on smartphones that give the latest markdowns at popular stores including Abercrombie & Fitch, Express and Macy's.

"Every day, all day long, I go online, I check the sales paper, I check the stores, I write what store has what," said one shopper. "If there is something I need then I go to that one store."

Added McBride, "The spendthrift Americans of a few years ago have given way to a much [more] frugal mindset now and some of that is just out of necessity, with high unemployment and wages that aren't keeping pace with inflation."

But it seems while Americans are taking control of their finances they could also be risking the economic recovery of the entire nation. Consumer spending accounts for a whopping 70 percent of the economy.

"In the long run, we're all better off if Americans have more savings and less debt -- but in the meantime, it has some pretty negative consequences for the economy," said McBride. "This is an economy that is not getting a lot of traction because people are paying down debt, boosting their savings, trends that over the long term will be favorable for the economy but makes it painful for the short term."

In December 2007, at the start of the recession, Americans were saving just 2.6 percent of their disposable income, while in July 2011 they reportedly saved 5 percent.

"This type of widespread cut in spending, if it's sustained for any length of time, that is how recessions are born," McBride said.