How badly are consumers getting squeezed?

Due to high cost of living, we dropped our vacation this year. We cut eating out from once every two weeks to once a month, we reduced from two to one entree per dinner, we eat more vegetables in place of meat, we stopped going to the movies on weekend. In sum, we are tightening our spending in every way — that's why we are not injecting our spending into the economy, saving our money to pay for fuel to go to work. Does this mean President Bush's economic stimulus plan is a failure?
— H.N. N. Fairfax, Va.

We won’t know for awhile whether the latest stimulus package developed by Congress and the White House will be able to head off a substantial economic downturn. (There's already some talk of trying another round of checks.) While the rise in gasoline prices offset most of the economic benefits of the boost in spending power, consumers are apparently still finding ways to keep shopping. The latest retail sales numbers were surprisingly strong given the pressures most consumers are felling today.

Still, the rebate checks don’t do anything to attack the underlying causes of the squeeze. Wages have been rising slowly because many American workers are competing with much lower-cost labor overseas. Their employers – from airlines to food manufacturers – have had a tough time passing along higher costs by raising prices. If companies can’t raise prices, it’s tough for them to give workers significant raises. Aggressive cuts in interest rates by the Federal Reserve were supposed to get business growing again. But the recent jump in inflation means the Fed may have to reverse course — raising rates to clamp down on prices. If they do, those higher rates won't help the economy get back on its feet.

Americans have also lost another big source of spending power that kept the economy humming though much of the past decade: the equity in the rising value of their homes. Hundreds of billions of dollars were “cashed out” through home equity loans and refinanced mortgages; that spending power has all but evaporated as house prices have fallen.

Unless and until the rising foreclosure rate can be reversed, that home equity piggy bank will remain empty for most Americans. The initial problem — exploding adjustable mortgages that left homeowners with monthly payments they can’t afford — shows no signs of letting up. Despite lending industry press releases about their ongoing efforts to work out more affordable loans, very little progress is being made to keep defaults from rising.

Based on the pace of foreclosures in May, another three million homeowners will hand over the keys to the bank this year. As the economy continues to shed jobs, that foreclosure rate could rise even further.

As those foreclosed houses hit the already glutted housing market, the problem only gets worse. Congress and the White House have been wrestling over proposals to fix the problem. Congressional leaders say they hope to have a housing relief bill on the president’s desk by July 4th, but it remains to be seen how many homeowners will be helped by the plan.

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