Consumer buying may take long time to heat up

— -- If you're lusting for a Lexus or pining for a piano, you're part of a big crowd. Despite a jump in July, consumer spending has slowed to a crawl.

"We've been putting off a bathroom renovation and a new car," says Ken Whitehead, consultant for UnitedHealthcare in Franklin, Tenn. "We've been worried about the economy and the lack of growth that we've seen."

Until consumers such as the Whiteheads start to buy the things they're yearning for, the economy will remain mired in a slump. Consumer spending is the main engine of U.S. economic growth. "Consumers are very apprehensive and cautious in spending, and we expect that to continue," says Diane Swonk, chief economist at Mesirow Financial.

That's the question that politicians and economists are pondering now: What will it take to get you to open your wallet? Low interest rates haven't helped; tax cuts haven't, either. Raises and a better job market would be a big help, but businesses won't start hiring until — you guessed it — spending rises. "It's a Catch-22 situation," says Lynn Franco, chief economist for The Conference Board.

A tenet of economics is that in a recession, people start pining for things they want, but can't afford. That's called pent-up consumer demand. Eventually, they save enough (or get more income) and break down and buy those things. When that happens, the recession ends.

Consider your car. Increased auto sales don't just enrich car salesmen and car companies. There are hundreds of companies that make parts for cars, and that demand flows to them. Stepping further down the automotive food chain, increased auto sales means higher demand for raw materials, such as rubber, steel and plastics.

There's plenty of pent-up demand for new cars. The odds are good your current car is older than your last car was when you sold it. In 2010, the latest data available, the average car on the street was 11 years old, up from 8.4 years in 1995, according to Polk, which tracks auto data. More cars were scrapped in the 15 months ended March 2010 than were sold.

Cars are better built than they used to be, which is one reason people are hanging on to them. But another is that people simply don't feel comfortable buying a new one in the current economy. "What we're seeing now is that consumers are more in favor of repairing an aging auto than taking on new debt," Franco says.

Houses are the other obvious example. A new home means work for carpenters, construction workers, sawmill operators and real estate agents. But even if you buy an existing home, you'll probably also be in the market for carpet, furniture, drapes and lawn gnomes.

Existing home sales have slowed to a trickle, although they're remarkably affordable. The median price of existing houses relative to average employment income per worker is at its lowest since the 1970s, says John Lonski, economist for Moody's Analytics. Mortgage rates are at levels last seen in the Truman administration.

Banks have also tightened lending standards following the 2008 mortgage-backed securities debacle. The number of people who can refinance — those with sterling credit records and equity in their homes — has shrunk dramatically.

Most important, house prices have continued to swoon. The Standard and Poor's/Case-Schiller index of home prices is down 32% from its high in the first three months of 2006, and down 6% from a year earlier.

"People are fearful of further price declines," Lonski says. "They're waiting for home prices to bottom decisively."

Keeping spending down

A fistful of conditions — some long-term and intractable — are keeping consumers from spending more.

The most obvious is unemployment.

When the jobless rate is 9.1% and new layoffs are announced almost weekly, people save instead of spend.

Ultimately, saving is a good thing, because that money will get spent eventually. But as long as unemployment remains high, spending will lag.

"I'm cutting back, unless it's for something vital," says Joe Micallizzi, 46, a baggage handler for Continental Airlines. "I'm not too worried about my job, but I'm being cautious. You never know what any company might do."

Corporate balance sheets might not be as robust as people think, Lonski says. True, large companies are sitting on a mountain of cash: Non-financial companies in the S&P 500 stock index have $963 billion in cash.

But smaller companies have seen their cash stash dwindle 13.4% since the fourth quarter of 2007, Lonski says. Companies that aren't in the S&P 500 account for 84% of all private-sector jobs. Companies with fewer than 50 employees account for 45% of all private sector jobs. "Small to midsize businesses are not posting the same strong financial results that larger corporations are," Lonski says. As a result, they won't be hiring much, which dampens consumer spending.

The other side effect of high unemployment: falling wages. Companies know they can hire a replacement for you — and probably at a lower wage.

As a result, average wages, adjusted for inflation, have fallen, while employees have to pay an increasing portion of their health care and retirement costs. The upshot: Workers have less money to spend.

But there are other factors keeping America's purse strings tied:

•Political gridlock. The debt ceiling debacle in August that pushed the U.S. close to default and prompted Standard & Poor's to downgrade the nation's credit rating left businesses uncertain about the future.

"Gridlock is bad," Swonk says. "Paralysis is bad for business."

Retail sales flatlined in August, Swonk says, and one reason was that confidence in government reached new lows during the debt debate.

•Global woes. Daily news of the possibility of a Greek default — or worse — does little to calm consumers.

•Age. The U.S. is getting older, and older people are more likely to be downsizing than spending. "It's really easier to sell to a younger market than an older one," Lonski says.

But as the 77 million Baby Boomers — those born from 1946 to 1964 — move into old age, they're less likely to spend.

In the big recession of 1980-1981, the population age 15 to 49 was growing 1.3%, and the population age 50 to 64 was actually shrinking, Lonski says.

Today, the population age 50 to 64 is growing at a 1.9% pace, vs. 0.1% for those ages 15 to 49.

"All the fiscal and monetary stimulus in the world won't make America young again," Lonski says.

The Federal Reserve on Wednesday announced a program of buying long-term Treasury securities and mortgage-backed securities, in bid to keep borrowing rates low.

The 30-year fixed mortgage rate is 4.09%, according to mortgage giant Freddie Mac.

Even so, few economists are expecting pent-up consumer demand to be released any time soon. "It's going to be a long, slow crawl," Swonk says. Fed actions will help on the margins, she says. "And when you have a marginal economy, every little bit helps."