Americans’ economic insecurities grow

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Market update

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Many people gauged their well-being in wealth — looking at the stock market, and much more broadly, the rise of real estate prices, said Susan Sterne, president of Economic Analysis Associates.

Americans borrowed freely against the value of their homes. But now there is nothing left to shield them from the insecurities rooted in the old measures of economic prosperity.

Except for the late 1990s, pay has been stagnant for more than a generation, barely keeping pace with inflation. In 1973, the median male worker earned $16.88 an hour, adjusted for inflation. In 2007, he earned $16.85.

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For many families, the stagnation has been moderated by the addition of a second paycheck as more women went to work, and their pay rose over the same period.

But the largest gains went to workers at the top of the pay scale. Now, economic worries are rising fastest in households with smaller paychecks, and that chasm is widening.

"Over the past decades, whether inflation was much higher or lower, or incomes grew faster or more slowly, there has never been such a wide divergence in the experiences" separating richer households from poorer ones, Richard Curtin, the director of the University of Michigan's consumer survey said in summing up the most recent figures.

Pullback by consumers
That insecurity shows in small, but telling ways. Shoppers at drug store chain Walgreens Inc. are increasingly bypassing name-brand cough syrups and pain relievers and choosing cheaper store brands. Wal-Mart Stores Inc. noticed that many people who received its gift cards for the holidays used them in January to buy food and other necessities instead of extras.

The pullback by consumers contrasts with years of continued spending that long seemed to contradict mounting worries.

Worker optimism, which soared in the late 1990s, never fully rebounded after the last, brief recession. Although jobs again were plentiful, it became clear the new economy's opportunities came with few of the old assurances.

Rennie Sawade, the son of a Michigan auto worker, majored in computer science because he saw no future on the assembly line. He was rewarded with a job at Oracle Corp., but lost it in late 2005 when the company shifted his department's work to India. Sawade, who lives in Woodinville, Wash. near Seattle, has been unable to find a full-time replacement, instead jumping from contract job to contract job.

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The contractor offers a 401(k), but contributions are entirely up to workers. When Sawade's wife was diagnosed with thyroid cancer last year he missed the equivalent of two weeks work — and pay — to take care of her. The job has health insurance but still left the family with a bill for more than $2,000. Contractors call to offer other jobs, but the pay is frequently disappointing, he says.

"It was pretty well known when I was working on my bachelor's degree that the auto industry was going to move overseas," he says. "Everybody said get into technology because you'll have a career. Now it looks like the same thing is happening to technology."

Cutbacks and changes by employers also have pushed heavy responsibilities on to workers, many who find themselves unprepared.

In the past decade, scores of companies have frozen or eliminated benefit plans providing a guaranteed pension. Many have replaced them with 401(k) plans whose future worth depends on workers' investment skill. Almost half of all households are at risk of coming up short in retirement, according to the Center for Retirement Research at Boston College.

Worry also grew about the cost of health care, with good reason. Since 2001, the cost of health insurance has gone up 78 percent — about $1,500 more per year for the average family, according to the Kaiser Family Foundation. Over the same period, wages rose about 19 percent, and inflation about 17 percent. About four in 10 people polled by the group say they are worried about paying more for health care or insurance.

Even the consumption made possible by easy credit has helped turn up the financial pressure. The number of products — from air conditioners to cell phones — that Americans say they can't live without has grown substantially in recent years, according to the Pew Research Center. About 6 in 10 working Americans polled by the group say they don't earn enough to lead the life they want.

Economic confidence is, largely, a self-fulfilling prophecy. The more consumers believe the economy is heading downhill, the more likely they'll rein in spending that will contribute to a downturn.

"I think if people were generally more satisfied and less anxious perhaps they would be more resistant to thinking things were deteriorating rapidly," says Andrew Kohut, president of the Pew Research Center.

Maybe the downturn in optimism is temporary. Americans are voracious consumers and persistent optimists.

Fundamental change in behavior?
But some believe a fundamental change in behavior and mind-set is taking place. Since the early 1980s, consumers' contribution to the economy has risen from 63 percent, near where it had long hovered, to 70 percent. Baby boomers spent generously on growing families. Interest rates and inflation dropped, making homes and other assets worth more and cutting borrowing costs. The spread of easy credit promoted spending.

Now, those are drying up and the population is aging. Older households don't spend as much, and often assess the economy more conservatively. Over the next generation, that could drive consumers' contribution to the economy back down to the low-60 percent range, Zandi said.

"There were tail winds behind" the growth in consumer spending over the last 25 years, he says. "Now there are headwinds."

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