Consumer confidence improves slightly in November

In the November 24, 2009 article "Consumer confidence improves slightly in November," Associated Press retail writer Anne D'Innocenzio explains that economists look to consumers to reviving the lagging U.S. economy because their purchases account for about 70% of overall demand for newly produced goods and services:

NEW YORK – Americans' confidence in the economy improved slightly in November from October, but shoppers remain gloomy heading into the traditional start of the holiday shopping season amid a weak job market, according to a monthly survey.

The Conference Board, based in New York, said Tuesday that its Consumer Confidence Index edged up to 49.5, up from a revised reading of 48.7 in October. Economists surveyed by Thomson Reuters expected a reading of 47.7.

The index, which hit a historic low of 25.3 in February, had enjoyed a three-month climb from March through May, fueled by signs that the economy might be stabilizing. The road has been bumpier since June as rising unemployment has taken a toll on consumers. A reading above 90 means the economy is on solid footing. Above 100 signals strong growth.

One component of the Conference Board's confidence gauge that measures consumers' assessment of the current economy fell slightly to 21.0, compared with 21.1 in October. The other that measures shoppers' outlook over the next six months increased slightly to 68.5 from 67.0 in October.

"Income expectations remain very pessimistic and consumers are entering the holiday season in a very frugal mood," said Lynn Franco, director of The Conference Board Consumer Research Center in a statement.

Economists watch consumer sentiment because spending on goods and services for consumers accounts for about 70 percent of U.S. economic activity by federal measures.

While the reading doesn't always predict short-term spending, it does serve as a barometer of spending levels over time, especially for big-ticket items.

Retail sales showed some signs of life in September and October, with major merchants collectively posting two consecutive monthly gains in sales in more than a year, according to the International Council of Shopping Centers-Goldman Sachs Index.

That followed more than a year of declines as shoppers shut their wallets tight. But business still remains weak and shoppers are still focused on necessities like socks, coats and underwear.

Experts say depressed spending is likely to persist for several years amid stubbornly high unemployment. The unemployment rate is now at 10.2 percent, the highest in 26 years, and 15.7 million Americans out of work. Meanwhile, the housing market has showed signs of improvement, but overall the sector is still tepid.

A housing report announced Tuesday showed home prices improved for the fourth straight month in September, though only in 11 out of 20 major metropolitan areas.

The Standard & Poor's/Case-Shiller home price index, which tracks prices in 20 major metropolitan markets, rose 0.3 percent in September.

The Conference Board's confidence survey, which is based on a representative sample of 5,000 U.S households, showed that shoppers' assessement of the job market remains weak. The cutoff for the preliminary results wsa Nov. 17. Those claiming jobs are "hard to get" increased to 49.8 percent from 49.4 percent, while those claiming jobs are "plentiful" decreased to 3.2 percent from 3.5 percent.

Consumers' short-term outlook improved slightly in November, but that's because those expecting conditions to worsen decreased to 15.1 percent from 18.2 percent, Franco said. The percentage of consumers expecting an improvement in business conditions over the next six months decreased slightly to 20.0 percent from 20.8 percent.

Those anticipating more jobs in the months ahead declined to 15.2 percent from 16.8 percent. But those expecting fewer jobs declined to 23.1 perent from 26.1 percent. The proportion of consumers expecting an increase in their incomes decreased to 10.0 percent from 10.7 percent.

What's getting cheaper in the recession

In the October 5, 2009 article "Great Time for U.S. Consumers: America Is on Sale," Rachel Beck reports that "one benefit of US recession is the boon to consumers: America is on sale." The U.S. recession has increased unemployment and reduced the incomes of many people. Reductions in income cause a decrease in the demand for normal products. (The demand curve shifts to the left.) Thus, this article provides a good example of how a decrease in the demand for products reduces their prices, other things equal (ceteris paribus).

There has never been a better time to be a consumer. America is on sale.

The Great Recession has caused massive job losses and hardship for millions, but it has also fostered a shoppers' paradise. Anyone who still has the means to spend can find unheard of deals.

Prices on everything from clothes to coffee to cat food are dropping, some faster than they have in half a century. Items rarely discounted -- like Tiffany engagement rings -- are now on sale. The two biggest purchases most people make -- homes and new cars -- are selling at steep price reductions.

"This is the new normal," says Donald Keprta, president of Dominick's, a supermarket chain in the Midwest, which just cut prices by as much as 30 percent on thousands of items. "We aren't going back."

Consumers like Karen Wilmes, a mother of two in Hopkinton, R.I., relish the steals. During a recent trip to Shaw's Supermarkets, she bought a basketful of goods, including Eggo waffles, Kleenex tissues and Betty Crocker cake mix. The retail price: $63.89. Wilmes paid $7.31 by buying items on sale and using coupons.

"The deals out there are unbelievable," says Wilmes, 36, who writes the Frugal Rhode Island Mama blog, which tracks local and national bargains. "We can put the money I save toward something else."

And she's doing just that, but only when she can find another deal. Wilmes and her husband recently bought a Samsung television from Best Buy's Web site for $1,299, about $300 less than she found at other stores. She also got free delivery and another $13 back from ebates.com, which receives commissions from online retailers for directing customers their way.

What's happening now has been building for years. Wal-Mart Stores Inc. introduced "every-day low prices" many years ago. Amazon.com redefined the idea of bargain prices during the late 1990s when it helped introduce online shopping. After the 2001 recession, automakers introduced zero-percent financing to boost sales. McDonald's "Dollar Meals" made fast food even cheaper.

But until the Great Recession came along, consumers hadn't seen anything yet.

Last fall's financial meltdown triggered a plunge in stock prices and home values and wiped out 11 percent -- $6.6 trillion -- of household wealth in six months. It also put an end to easy credit, which had fueled the consumption that powered the economy for most of the decade.

Those who still have jobs don't want to spend as they once did. There is a new societal pressure to be careful and smart when buying almost anything. From Chicago's Miracle Mile to malls around Orange County, Calif., it was once a status symbol to trot around with armloads of shopping bags with designer names on them. Now, it's considered ostentatious.

Traditionally, manufacturers and retailers lowered prices to clear inventory. Today, they're cutting prices because consumers are demanding it. If it lasts, the ramifications will be wide-ranging.

"There's almost a new morality to spending," Liz Claiborne Inc. CEO Bill McComb told an investor conference last month.

The bargains being offered at the Garden State Plaza in Paramus, N.J., make it seem the day after Christmas. But it's only a weekday in September. The deals start at 25 percent off and keep getting better. Neiman Marcus, Forever 21, Ann Taylor, Macy's, Gap -- across the retailing spectrum there are promotions.

Retail sales remain sluggish, and more than half of the people surveyed recently by America's Research Group and UBS said they are shopping less. But when they do shop, most go to stores with lower prices or wait for sales before returning to their favorite retailer, according to the survey.

Dave Ratner sees this price chase first hand. His four-store chain in western Massachusetts, Dave's Soda & Pet City, has never been so focused on promotions and low prices. During the past year, customers stopped buying $50 bags of premium dog food and "special" $10 pet treats. Pet-related Halloween merchandise usually sells well, but he isn't stocking any this year because he doesn't think people will buy it. Instead, he's offering big discounts on cheaper brands of pet food.

"It's killing my profit margins, but if you don't offer specials and lots of promotions, you aren't operating in the current world," he says.

Great buys are not exclusive to retailing. The government's Cash for Clunkers program is over, but more than half of car buyers still get a cash rebate, according to J.D. Power & Associates.

Hotel rooms cost travelers nearly 20 percent less, on average, than last year, the biggest decline since Smith Travel Research began collecting data in 1987.

Home prices have dropped 30 percent, on average, from the peak in 2006. In some markets, they're down more than 50 percent. Homes in parts of Detroit are cheaper than a new car.

Overall, prices are tumbling at the fastest rate in decades. The government's Consumer Price Index, which measures the average price of goods and services purchased by households, has fallen 1.5 percent over the last 12 months. The reading for July showed a 2.1 percent annual decline, the biggest since 1950.

The largest decline has been in energy prices, but other areas have fallen, too. Among them: food, appliances, furniture, jewelry, sporting goods, audio and visual equipment and apartment rents.

People like Bruce Halkin, 64, an advertising executive in Aventura, Fla., are benefiting. He will soon close on a three-bedroom home in nearby Boca Raton on a golf course. He's paying $335,000, 8 percent below the $365,000 asking price. The sellers bought the home for $410,000 in 2006 and spent $75,000 on renovations.

Halkin's deal-chasing doesn't stop there. On a recent trip to Macy's, he picked up two pairs of Ralph Lauren Polo shorts, a Polo shirt and a hat for $50. At full price, the bill would have topped $200.

"I've learned to buy when I see deals not necessarily when I need anything," he says. "Thankfully, the bargains keep coming."

Those with goods and services to sell hope that the discounting bolsters sales, which would help get the economy chugging along again. Consumer spending accounts for 70 percent of the economy.

But ever-lower prices have risks, too. The more shoppers expect prices to fall, the less they shop until prices drop. It becomes a self-fulfilling prophecy that forces companies to keep cutting. That reduces profits, making it less likely companies will hire workers or raise wages. Economists say the worst scenario would be a deflationary spiral, which Japan has been stuck in for the last two decades.

"The Japanese government has been trying to stimulate the economy there since the 1990s," says Gary Shilling, who runs an economic consulting firm in Springfield, N.J., and has written two books on deflation.

The U.S. economy is not near such an extreme. But what's emerging is the realization that pricing is being redefined.

Dominick's supermarkets announced in late August that prices on a range of items in its 81 stores would fall by as much as a third. Included in the cuts were both private-label goods and national brands, such as Coffee Mate creamers, Bumble Bee tuna and Tombstone frozen pizza.

Profit margins at grocery stores typically are just 2 percent. Dominick's hopes the low prices will attract customers, who will also buy enough full-priced items to make up the difference.

Other companies are assessing pricing as never before. Procter & Gamble long dismissed the idea of cutting prices for its stable of well-known brands, including Tide detergent and Gillette razors.

In September, the world's largest consumer products maker relented. It announced price cuts across 10 percent of its global line and plans to increase its promotions emphasizing value.

Others are learning that aggressive price cutting can move merchandise. Sony cut prices on its PlayStation 3 video game console by $100 to about $300 in August, and sales shot up 300 percent during the following three weeks.

Dick's Sporting Goods sold boxes of a dozen Nike One golf balls for $42.99 at the start of the year. The balls are used by Tiger Woods and other professional golfers, but sales were lackluster. Now, Dick's offers two boxes for $59.

Demand has soared.

Note that the last sentence of this article is incorrect. The demand for golf balls has NOT soared. (There has been a soar in the QUANTITY DEMANDED.) The article's author does not understand the difference between DEMAND and QUANTITY DEMANDED. When the price of golf balls decreases, there is an increase in the quantity of golf balls demanded. There is NOT an increase in demand. That would imply consumers wish to purchase more golf balls AT EVERY POSSIBLE PRICE.

Jobs and manufacturing data suggest slow recovery

In the October 1, 2009 article "Jobs and manufacturing data suggest slow recovery," Associated Press economics writer Martin Crutsinger reports that the "US economic recovery looks weak as data on jobs, incomes and manufacturing miss expectations."

WASHINGTON (AP) -- The U.S. economy is having growing pains.

Discouraging new reports on unemployment and manufacturing Thursday reinforced worries that job losses and meager factory output will make for a weak recovery as the nation climbs out of the worst recession in decades.

Stocks tumbled in response. The Dow Jones industrial average had its worst day since early summer, falling 203 points to 9,509. Just last week, it was within shouting distance of 10,000.

"The economy is not moving quickly from recession to expansion. It is moving in a very halting way," said Mark Zandi, chief economist at Moody's Economy.com. "Given the severity of the downturn, we are not going to come roaring back."

First-time jobless claims rose more than expected last week to a seasonally adjusted 551,000, the Labor Department said. Economists viewed it as a sign that employers remain reluctant to hire.

Economists think the economy lost 180,000 more jobs in September. The unemployment rate is expected to climb from 9.7 percent to 9.8 when the government releases its monthly jobs report Friday.

And factories are struggling to mount a rebound. A gauge of manufacturing activity came in at 52.6 for September, the Institute for Supply Management said -- enough to signal growth for the second straight month but still down from August.

The gloom on Wall Street to start the fourth quarter came despite encouraging signals on consumer spending and construction.

Construction spending rose 0.8 percent in August, including the biggest increase in housing activity in nearly 16 years. But spending for office buildings, hotels, shopping centers and government projects all declined.

Consumer spending rose a bigger-than-expected 1.3 percent in August, the best gain since October 2001, when the country was recovering from the Sept. 11 terrorist attacks. But about a third of that increase came from the government's Cash for Clunkers program.

Once the trade-in program ended, car sales fell back. General Motors and Chrysler said Thursday that their sales fell more than 40 percent in September. Ford reported a 5.1 percent drop.

The August spending report showed personal incomes continue to lag: They edged up 0.2 percent, helped by an increase in the minimum wage that took effect in July.

Economists fear weak income growth means that the jump in consumer spending won't last. Consumer spending is vital for a sustained recovery because it accounts for about 70 percent of all economic activity.

The jump in spending and the much smaller gain in income sent the personal savings rate down to 3 percent in August, from 4 percent in July. Analysts think Americans will keep saving more in the months ahead, trying to rebuild their nest eggs.

Many economists believe the economy is growing again after the longest recession since World War II -- perhaps at a rate of 3 percent or more in the just-ended third quarter.

But David Wyss, chief economist for Standard & Poor's in New York, said he expects growth to slip to an anemic 0.8 percent in the final three months of this year, and perform only a little better next year.

"The good news is that it will be positive, but it will not be a barnburner," he said.

Weak growth like that would not be strong enough to bring down the unemployment rate. Wyss predicts it will peak at 10.4 percent around the middle of next year. The recession has already eliminated almost 7 million jobs.

Those losses are weighing on Americans as they struggle to pare debt and build up savings accounts decimated by the stock market slide. And tighter lending has made spending difficult even for people who want to shop.

"With all that is going on, this is going to be a subdued rebound -- two steps forward and one step backward," said Sal Guatieri, an economist with BMO Capital Markets.

The rise in jobless claims last week came after three weeks of declines. The four-week average, which smooths out fluctuations, dropped to 548,000. That's well below the peak, in early April, but signals a weak labor market.

Unemployed workers are having a hard time finding new jobs. The number of people continuing to collect unemployment benefits fell by 70,000 last week to the lowest level since April, but there were 6.1 million still on the jobless rolls.

When federal emergency programs are included, almost 9 million people were getting jobless benefits in the week that ended Sept. 12. That's little changed from the previous week.

Congress has already added as much as a year of extra benefits on top of the roughly six months provided by most states. Congress is considering extending benefits even further, but the Senate plan was being slowed Thursday by some lawmakers upset that their states would be left out.

Consumer confidence unexpectedly falls in Sept.

In the September 29 article "Consumer confidence unexpectedly falls in Sept.," Associated Press retail writer Anne D'Innocenzio reports that consumer confidence is lower than expected:

NEW YORK – Americans' worries about job security flared up in September, causing a widely watched barometer of consumer confidence to fall unexpectedly and raising more concern about the upcoming holiday shopping season.

The New York-based Conference Board, a private research group, said that its Consumer Confidence Index dipped to 53.1 in September, down from the revised 54.5 reading in August. Economists surveyed by Thomson Reuters had expected a reading of 57.

The index — fueled by signs that the economy might be stabilizing — had enjoyed a three-month climb since hitting a historic low in February of 25.3 but has been bumpy since June as rising unemployment has caught up with shoppers.

A reading above 90 means the economy is on solid footing. Above 100 signals strong growth.

Economists watch consumer sentiment because spending on goods and services for consumers, including housing and health care, accounts for about 70 percent of U.S. economic activity by federal measures.

The Conference Board's Present Situation Index, which measures consumers' current assessment of the economy, declined to 22.7 from 25.4. The Expectations Index, which measures consumers' outlook over the next six months, dipped to 73.3 from 73.8 last month.

"While not as pessimistic as earlier this year, consumers remain quite apprehensive about the short-term outlook and their incomes," said Lynn Franco, director of The Conference Board Consumer Research Center. "With the holiday season quickly approaching, this is not very encouraging news."

The big concern is the job market. Economists surveyed by Thomson Reuters project job losses slowed in September. On average, they predict 180,000 were lost this month, down from 216,000 in August. But Labor Department figures to be released this Friday are projected to show unemployment ticking up to 9.8 percent in September from 9.7 percent in August.

The weak job market, along with tight credit, has led shoppers to limit spending and focus on discounts when they do buy. Even those not worried about losing a job or finding a new one are embracing frugal behavior, buying only necessities and using more coupons.

Economists expect holiday sales to be at best flat from a year ago, the weakest holiday season since at least 1967 when the Commerce Department started collecting the data.

"Shoppers' habits have changed," said Frank Badillo, senior economist at consulting group TNS Retail Forward. "They remain focused on cutting back and trading down to discount retailers and to lower-priced brands. All of those behaviors are going to be enforced over the holidays."

Badillo projects sales for October through December won't change from last year, compared with the 4.5 percent decline last year from the year before.

The consumer confidence survey was sent to 5,000 households and had a cutoff date of Sept. 22.

The survey showed that consumers' appraisal of the job market was less favorable than the previous month. Those claiming jobs are "hard to get" increased to 47.0 percent from 44.3 percent, while those claiming jobs are "plentiful" decreased to 3.4 percent from 4.3 percent.

Meltdown's lasting cultural impact tough to gauge

In the September 27, 2009 article "Meltdown's lasting cultural impact tough to gauge," Associated Press national writer Jocelyn Noveck reports:

The economy is really bad, Jay Leno told his "Tonight Show" audience in March.

How bad?

"So bad that on 'Sesame Street,' they won't even talk about the letters A, I or G anymore."

Not that Leno was content to leave it at that. In fact, in eight months starting on Labor Day 2008, the comedian told no fewer than 863 jokes about the financial meltdown in his "Tonight Show" monologues, according to a Washington group that monitors such things.

Counting jokes is straightforward enough. It's a lot harder, of course, to gauge the more subtle ways in which the Great Recession has impacted our culture: How we interact, how we entertain ourselves, how we worship, what we wear and buy and read and watch.

One cultural message has been clear, and Leno's populist jokes reflect it: The country has been in no mood to celebrate ostentatious wealth, or those forces seen to have brought us to such a precarious place in our history.

But some historians say such a mood is in some ways cyclical, a phenomenon that has followed past recessions and then disappeared — until the next downturn.

"It's a critique that emerges periodically in our history, that consumption is corrupting," says Peter J. Kastor, a professor of history and American culture at Washington University in St. Louis. "Those concerns have been around since 1776." But, he says, we are a society of consumers, and that's what will ultimately prevail. Others agree.

"Certainly, you can see more critical attitudes toward conspicuous displays of wealth," says Bruce Schulman, a historian at Boston University. "And you can expect popular culture to reflect those attitudes. But we are a country that depends on consumption, and that's why I would not expect us to see really enduring cultural changes."

Perhaps that's also why some designers allowed themselves a little optimism at this month's Fashion Week shows in New York. The glitz of some previous spring seasons was gone, but in contrast to the more somber fall styles now in stores, one could spy some feathers and even a little tinsel from at least one influential label, Proenza Schouler.

"The last thing the world needs is another black pencil skirt," said Proenza's Lazaro Hernandez. "You want something that feels more joyful." And something different, he might have added, to bring women back to the stores and keep the industry afloat.

Designer clothes are, of course, accessible only to a few. One can't say the same for movies, which do well in times of economic distress because they're a relatively cheap, not to mention escapist, form of entertainment.

Indeed, Hollywood is coming off a huge summer in what's been a banner year, with revenues running at a record pace of $7.4 billion for the year, 7.8 percent ahead of 2008 ticket sales, according to box office tracker Hollywood.com.

Could the content of our films be impacted by the recession, just as the Great Depression fueled the popularity of Frank Capra's common-man-fights-corruption films? There's always a lag between current events and cinematic versions of them, because it takes time to get movies made. One upcoming film, though, promises a scathing look at the forces that contributed to the recession: Oliver Stone's "Wall Street 2," now filming, with Michael Douglas returning as Gordon Gekko, the voracious financier who uttered that famous line, "Greed is good."

As for comedy, look for Leno, David Letterman and others to continue to wring all the rueful jokes they can out of our economic woes. "Populist outrage is the undercurrent of all of it," says Dan Amundson, research director at the Center for Media and Public Affairs, which monitors the late-night shows. "Particularly for Leno, it's been a regular shtick." (A favorite Leno target has been AIG, the insurance giant bailed out by the government.)

The recession may also have changed the nature of our celebrity obsession. Take a look at your favorite celeb weekly these days, and the cover story will as likely be about a reality TV star, like Kate Gosselin of "Jon & Kate Plus 8," now famously split from her equally famous reality husband, as about a movie star or wealthy socialite like Paris Hilton.

"It brings the celebrity addiction down to our own level," says Samir Husni, director of the Magazine Innovation Center at the University of Mississippi. "It's a more serviceable fantasy. Not everyone can be Beyonce, but we can be Kate."

From celebrity worship to houses of worship: Though charity giving in America fell by 2 percent in 2008, forcing many groups to lay off staff, cut wages and eliminate programs, the same wasn't true of giving to religious organizations, which was actually up by 5.5 percent, according to a study by Giving USA.

And, in what could be called a further silver lining for religious institutions, many have sensed a renewed purpose in serving communities that need them more than ever.

"It's an opportunity for the church to be the church," says Susan DeLay, spokesperson for the Willow Creek megachurch outside Chicago, which has four campuses and a combined attendance of about 24,000 worshippers each week. "It's an affirmation of what God has called for the church to be. That's very satisfying."

Unlike some other churches in more hard-hit areas, attendance at Willow Creek has remained basically steady, while giving is down by 2 percent so far this year, DeLay says. Meanwhile, there's been a huge increase in demand for the church's services — such as the food pantry, where output is almost twice that of last year.

Demand has also gone up for the church's cars ministry, which gives donated cars to those in need, and for a career transition workshop. And also for premarital counseling, DeLay says: "It's interesting that people are eager to give their marriages the best chance."

Speaking of marriage, one might think the divorce rate would go up in times of economic difficulty. There are, however, no statistics yet available past 2007, according to the National Center for Health Statistics, which compiles the information from states.

Whether divorces are up or down, divorce attorneys say anecdotally that they're busy in court amending agreements because people's finances have changed, with some unable to keep up their financial obligations to their exes. Another product of both the recession and the collapse of the housing market: Some couples are staying together under the same roof, albeit unhappily, because they can't sell their homes or can't afford to divorce.

And then there are the more subtle effects of economic stress on family life, the lasting nature of which will likely depend on how long the recession itself lasts.

"Both as couples and as parents, adults under stress often forget to express the kind of daily appreciation of partners and children that makes family life go smoothly," says Stephanie Coontz, a professor of family studies at Evergreen State College in Washington state and the author of "Marriage, A History."

On the other hand, she notes, there may be long-range benefits from the economic meltdown, such as families learning to entertain and cook for themselves. They're figuring out how to spend time together, rather than money.

"When people can't afford to outsource family chores or pick up fast food, for example, they may rediscover the pleasures of doing some tasks as a family," she says.

"If the Great Depression is any guide, one long-term good result of this economic crisis could be to remind people that bad things can happen to good people, and that ultimately we are all in the same boat — or at least subject to the same tides."
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Consumer Spending Likely To Rise In Q3, But Outlook Cloudy

In the September 17, 2009 article "Consumer Spending Likely To Rise In Q3, But Outlook Cloudy," Scott Stoddard reports that government macroeconomic stimulus policies have increased consumer spending and aggregate demand:

Gains in retail sales, home purchases and household wealth are bolstering views that consumer spending has stabilized after weighing on the economy for a year. But analysts warn that outlays could remain tepid for two years, making for a sluggish recovery.

Consumer spending, which accounts for about 70% of GDP, is set to rebound sharply in Q3 thanks mainly to government tax breaks and incentives, such as the Cash for Clunkers program that fueled auto sales. Experts say the economy could grow 3% or more in July-September after shrinking for four straight quarters.

But as federal stimulus spending wanes, the economy may struggle to maintain momentum as Americans are pressured by debt, tight credit and a weak labor market.

"The big concern for me is 2011," said Scott Brown, chief economist at Raymond James. "Hopefully, the private sector will be back on its feet and moving forward to offset the decreasing fiscal stimulus."

In a positive sign, household wealth rose by $2 trillion in Q2 to $53.1 trillion as stock values rebounded, the Federal Reserve said Thursday. It was the first gain since Q3 2007, when wealth peaked at $65.3 trillion.

"We're beginning to turn the tide," Richard DeKaser, chief economist at Woodley Park Research, said before the report. "But we have some ways to go before we completely recoup the losses of the last few years."

Housing starts and building permits also rose in August on strong demand for multifamily units, the Commerce Department said.

Adding to signs that the recession has ended, the Philadelphia Fed's index of business sentiment jumped 9.9 points in September to 14.1, a two-year high.

Economists caution, however, that the U.S. could experience a double-dip recession if unemployment and tight credit force consumers to curb spending.

Households trimmed debt at a 1.7% annual rate in Q2 while consumer credit plunged at a 6.5% rate, the Fed said, as Americans focused on paring debt and rebuilding savings.

The number of workers filing new claims for unemployment benefits dropped by 12,000 last week to 545,000, the lowest since early July, the Labor Department said Thursday.

But the number of people still on jobless rolls after an initial week of aid rose by 129,000 in the week ended Sept. 5 to 6.23 million, indicating that employers remain reluctant to hire. The jobless rate, already at a 26-year high of 9.7%, is expected to top 10%.

"We need to see income growth go back up and people need to feel more certain about their job prospects" before they feel confident enough to boost spending, said Mark Vitner, an economist at Wells Fargo Investments.

Big-ticket goods such as autos will probably bear the brunt of consumer cutbacks, analysts said.

A Bloomberg News survey on Thursday showed that almost a third of U.S. households plan to trim spending while 58% expect no change amid concern about the economy over the next six months. Just 8% of households plan to increase spending, the survey showed.

Vitner said that a double-dip recession was unlikely but that economic growth would likely taper off next year after the expiration of stimulus measures such as the $8,000 first-time homebuyer tax credit and Federal Reserve efforts to keep mortgage rates low.

"We're likely to see a relatively sluggish recovery," he said.

Fed: consumers cut debt by record $21.6B in July

In the September 8, 2009 article "Fed: consumers cut debt by record $21.6B in July," Associated Press economics writer Jeannine Aversa reports that consumers have paid down their debt as they have reduced their consumption spending:

WASHINGTON – Consumers slashed their borrowing in July by the largest amount on record as job losses and uncertainty about the economic recovery prompted Americans to rein in their debt.

Economists expect consumers will continue to spend less, save more and trim debt to get household finances decimated by the recession into better shape. However, such action is a recipe for a lethargic revival, as consumer spending accounts for 70 percent of economic activity.

The Federal Reserve reported Tuesday that consumers ratcheted back their credit by a larger-than-anticipated $21.6 billion from June, the most on records dating to 1943. Economists expected credit to drop by $4 billion.

Wary consumers and hard-to-get credit both factor into the scaled-back borrowing. But economists are split on which force — lack of demand by consumers or lack of supply from banks — is having the bigger influence.

"It's really a tug of war," said Mark Williams, professor of finance and economics at Boston University and a former Fed bank examiner. "It's true that consumers are being more responsible, saying 'I don't really need that extra credit card,' but it is more related to banks clamping down on lending."

But Erik Hurst, economics professor at the University of Chicago Booth School of Business, says it is impossible to know for sure. "We are seeing declines in demand for loans from consumers but also declines in the supply of loans from banks. How much of the credit cutback is due to the decline in supply or demand, you can't really tell."

Last month, the Federal Reserve, in a survey of bank loan officers, found somewhat weaker demand for all types of consumer loans. But fewer banks reported tightening their standards on credit card and other consumer loans, the Fed survey said.

Still, a report earlier this year by the company that produces the most widely known credit scores found that companies slashed limits for an estimated 58 million card holders in the 12 months ended in April, even though a high percentage had good credit scores when their limits were cut.

The cuts affected about a third of consumers, according to the study by FICO. But most people did not see a big impact on the credit scores because lenders often cut limits on cards that were unused or lightly used.

In Tuesday's report, demand for non-revolving credit used to finance cars, vacations, education and other things fell by $15.4 billion, also a record decline. That 11.7 percent pace was on top of an 8 percent annualized decline in June.

Consumers' appetite for revolving credit, primarily credit cards, declined by $6.1 billion in July, an annualized rate of 8 percent that followed a 6.4 percent drop in June.

July's retreat translated into an annualized decline of 10.4 percent. That followed a cut of $15.5 billion in June, or a 7.4 percent annualized drop, and the most since a 16.3 percent decline in June 1975.

The latest cut left total consumer credit at $2.47 trillion.

The magnitude of the drop surprised analysts. Some thought the Cash for Clunkers program — which began in July and aided auto sales and car loans — would have blunted cutbacks in other lending areas.

The Fed's measure of consumer borrowing does not include debt secured by real estate, such as mortgages or home equity loans.

Even though the unemployment rate dipped in July, it jumped in August to a 26-year high of 9.7 percent. Already, the recession has snatched 6.9 million jobs and unemployment is expected to top 10 percent this year as employers keep cutting.

That will make it harder for Americans to keep up with payments on credit cards and other kinds of loans, analysts said.

"As great as the clunkers program has been, it's tough to head out and buy a big ticket item when you don't have a job," said Richard Yamarone, economist at Argus Research. "Don't expect consumer credit to increase any time soon; the job situation is dismal, at best."

New frugality is the new normal, by necessity

In the September 7, 2009 article "New frugality is the new normal, by necessity," Associated Press retail writer Ashley M. Heher reports:

CHICAGO – A year after "shop 'til you drop" stopped, the nation fixates on this question: Will consumer spending ever return to pre-recession levels?

Increasingly, the answer appears to be no. Belt-tightening in bad times is normal. And after every other recession since World War II, penny-pinching quickly fell out of fashion and Americans resumed their demand for houses, cars and everything else.

This time it's different. Like the Great Depression in the 1930s, the Great Recession seems destined to turn many Americans into lasting coupon-cutters, scrimpers and savers. Consumers dug a debt hole over the past decade from which there's no easy climb out. The population segment that drives spending the most — baby boomers — faces special pressure: Boomers are running out of time.

A study by research firm AlixPartners concluded that once a new normal sets in after this recession ends, Americans will spend at about 86 percent of their pre-downturn level.

In an economy driven by consumption, the implications are far-reaching if that forecast proves correct:

• For every kitchen not remodeled, there will be lost sales of appliances and supplies, and fewer jobs for designers and contractors. As homeowners do work around the house themselves, there will be less work for gardeners, plumbers and handymen.

• For every shopper who trades down from luxury stores to discount stores, it will mean less profit for retailers and manufacturers. Retailers will continue to offer few product choices and leaner inventories, and they'll reassess store locations and advertising.

• If sales of cars and trucks average closer to the recession level of 10 million a year than the 16 million in boom times, more suppliers will fail and further consolidation among automakers could occur. Taxes not paid on lost vehicle sales will continue to stress budgets of state and local governments.

Frugality may be good for family budgets, but it's bad for the national economy. And that has the potential to reinforce and continue the miserly mood. A Gallup survey last month found seven in 10 Americans are cutting weekly expenses — a number that has been consistent through the summer.

A year after last fall's financial meltdown turned a garden-variety recession into the worst downturn since the Depression, thriftiness is still driven by the twin engines of necessity and fear. Unemployment, now at 9.7 percent, is still rising and expected to reach double digits before year's end for the first time since 1982. Many who still have jobs are getting paid less, and investments have a long way to go before they return to pre-meltdown levels.

Kathy Haney, 46, of Orland Park, Ill., has a job but is scaling back her shopping and packing her lunch.

"You put your priorities in different places because you never know if you're going to have a job tomorrow," the legal secretary says. "You think twice now. I have six TVs in the house. Do I really need a new flat screen?"

For her and many other Americans, the answer is no. The underlying causes of the meltdown and where it left millions financially suggests a fundamental change is under way. Personal spending has fallen in four of the last six quarters — the only time that's happened since quarterly records were first compiled in 1947.

In a normal recession, a vicious downward cycle of reduced spending by consumers and layoffs by employers finally eases and a virtuous cycle begins. Consumers start spending again. Factories ramp back up to meet the demand and hire workers. Incomes rise, fueling greater spending, more production and more jobs.

Until the Great Recession, the worst recession since World War II was in 1981-82. Unemployment peaked at 10.8 percent in December 1982, a month after the recession had ended.

The recovery that followed was powered by baby boomers, they were mostly in their 20s and early 30s then. Their careers were taking off, they were starting families, and they were spending freely. On homes, furniture, cars — and everything else. Saving for retirement was the last thing on their minds.

Fueled by boomers, when the recession ended, growth was explosive. Consumer spending rose 5.7 percent in 1983. GDP rose 4.5 percent in '83 and 7.2 percent in 1984.

"If someone gets more comfortable, they spend a little more," says Erik Hurst, an economist at the University of Chicago's Booth School of Business. "As they spend a little more, someone else spends more."

Jump to today. For most of this decade, Americans enjoyed a credit-fueled binge that allowed them to spend more than they made. They snatched up everything from gadgets to houses.

Those houses soared in value and became as valuable a source of cash as a bank ATM. Home equity was tapped to pay for vacations, new cars and kitchen renovations. The rising stock market gave people an inflated sense of wealth as they watched their retirement accounts grow.

Not unlike the Roaring '20s, which preceded the Great Depression three generations ago, people believed the good times would never end. Per capita personal spending ballooned 25 percent from 2003 to 2005, according to data from Euromonitor International.

When the party ended, the nation was left with more than just a hangover. Personal debt had doubled in a decade. As of July, it stood at $13.8 trillion, or about $124,000 per household. Despite months of frugality, that was only slightly below its 2008 peak.

It will take years to work down the debt, which will prolong people's thriftiness. Paying it down will be harder because of the layoffs, pay cuts, freezes and furloughs. Personal income has fallen or been flat eight of the past 10 months.

On the asset side of their balance sheets, plunging stock prices and home values have made Americans feel poorer. Their net worth — the difference between the value of what they own and what they owe — has taken a staggering $12.2 trillion hit in the Great Recession. Net worth fell from $62.6 trillion at the end of 2007 to $50.4 trillion at the end of this year's first quarter, figures from the Federal Reserve show.

The result: Consumer spending adjusted for inflation fell 0.2 percent in 2008 — the first annual drop since 1980. Hardest hit from the first half of last year to the first half of this year: Motor vehicles and parts (down 17.2 percent); furnishings and durable household equipment (down 8.8 percent); clothing and footwear (down 5.8 percent).

"There will be a fundamental shift in the kind of cars we buy, a fundamental shift in the homes we buy, and a fundamental shift in consumption generally," says Matt Murray, an economist at the University of Tennessee. "And that is not something that took place in the 1980s."

As in the 1980s, much of that shift will be driven by baby boomers. For the 78 million people born from 1946 through 1964, the Great Recession hit at a particularly inopportune time — during peak years of earning and saving before retirement. Boomers range from 44 to 63 today — the youngest is nearly 10 years older than the oldest was in 1982. They are running out of time and are most likely to remain cautious spenders and become aggressive savers even as the economy improves.

The housing bubble mistakenly led boomers and millions of others to believe their home was their retirement nest egg. If they left their home equity alone during the boom, they've taken a hit the last couple years but are still ahead. But many treated their home like a personal bank and spent the gains by tapping a home equity line of credit.

Some now feel disgusted with the great national buying binge and are reacting against it. Last month, Chicago playwright Maureen Riley began giving away what she amassed.

"I felt this tremendous clarity as I looked around and saw my space emptying out and my closet emptying out," the 55-year-old says.

Despite all the battered personal balance sheets, thriftiness will abate somewhat as the economy continues to recover. There will still be vacations and home remodeling. But there will be caution, too.

Sanda Schramm, 63, a second-grade school teacher from Florham Park, N.J., and her husband Rob, 64, made changes after their retirement funds fell 20 percent below their peak. They considered themselves frugal before the recession. Now, they are even more tightfisted.

Instead of scouring for 40 percent discounts at Macy's and other department stores, she looks for 75 percent markdowns and shops more at consignment stores. They go out to dinner once a month instead of twice a week. And most everything they buy is paid for in cash, not with a credit card.

When the economy bounces back and her retirement accounts recover, Schramm says she'll continue to shop at consignment shops but will probably go to restaurants more.

"When the housing market and stocks were booming, everybody felt wealthy," she says. "But when everything goes down, you feel you're vulnerable ... I have always been careful, but now I am even more careful."

Consumer spending edges up in July, incomes flat

In the July 28, 2009 article "Consumer spending edges up in July, incomes flat," Associated Press economics writer Martin Crutsinger reports that the signs of potential economic recovery are mixed:

WASHINGTON – Consumer spending edged up in July with help from the popular Cash for Clunkers program, but household incomes, the fuel for future spending increases, were flat.

Consumer spending is the big question mark as the economy struggles to emerge from the recession. Economists worry that households hurt by rising unemployment, weak income growth and depleted investments will not provide the support the economy needs to rebound to sustained growth.

The Commerce Department said Friday that consumer spending rose 0.2 percent in July, matching economists' expectations. Personal incomes were unchanged last month, a weaker showing than the expected 0.2 percent gain.

With incomes flat in July as spending rose, the personal savings rate dipped slightly to 4.2 percent from 4.5 percent in June. The savings rate was 2.6 percent a year ago.

Economists expect the savings rate to rise in coming months to around 6 percent as workers try to rebuild depleted nest eggs. The process of rebuilding savings is one of the factors expected to depress consumer spending and weaken the broader recovery.

The modest rise in spending last month followed a 0.6 percent jump in June, a gain driven by a surge in gasoline prices. Adjusting for inflation, spending rose 0.2 percent in July, and 0.1 percent in June.

The slight rise in spending reflected a 1.3 percent jump in purchases of durable goods such as cars, a gain propelled by the clunkers program that started at the end of July. Purchases of nondurable goods such as clothing actually fell 0.3 percent last month.

The unchanged reading for personal incomes followed large swings in the previous two months that reflected payments to individuals from the government's $787 billion economic stimulus program. Those payments pushed incomes up 1.4 percent in May and their absence in June caused incomes to fall 1.1 percent.

Incomes have taken a beating during the recession as employers slashed payrolls and forced workers to take unpaid days off to hold down wage costs. In addition, households with sufficient income to hit the shopping malls have trimmed their purchases and boosted savings to cope with a severe financial crisis which sent the stock market into a nosedive last year.

The concern is that consumer spending, which accounts for 70 percent of economic activity, may not be strong enough to propel a sustained recovery from the longest recession since World War II.

The Federal Reserve has pushed a key interest rate to a record low near zero in an effort to boost the economy and is pledging to keep rates low for a considerable period even as the economy begins to grow again.

The Fed is able to make that pledge because inflation is not a problem. A price gauge tied to consumer spending was unchanged in July after a 0.5 percent jump in June that had reflected a big rise in energy prices. Excluding food and energy, the price gauge showed a 0.1 percent rise, and over the past year increased 1.4 percent, well within the Fed's comfort zone for inflation.

The government reported Thursday that the overall economy, as measured by the gross domestic product, fell at an annual rate of 1 percent in the April-June quarter. It marked the fourth consecutive decline in GDP, the longest stretch on records that go back more than six decades.

Many economists believe GDP in the current July-September quarter will rebound to growth above 3 percent and remain at that level in the fourth quarter. The economic growth likely will reflect a boost from the highly successful clunkers program to boost car sales and other government stimulus efforts.

But the fear is that economic growth will slip back in the early part of 2010 as the impact of the government programs fade and unemployment rises. The 9.4 percent jobless rate in July is expected to edge up to 9.5 percent in August and keep rising until it tops 10 percent. That will be a tough environment to see strong gains in consumer spending.

Some analysts worry that the country could be headed for a double-dip recession in which the economy resumes growing for a brief period only to fall back into a downturn.

The troubles consumers face have meant tough times for the nation's retailers. A survey of big retail chains showed that shoppers remained tightfisted in July, a development that raised worries about back-to-school sales and the holiday shopping season later this year.

In July, mall-based apparel stores fared the worst with Macy's Inc. and teen retailers Abercrombie & Fitch Co. and Wet Seal Inc. reporting disappointing results.

However, apparel discounters like Ross Stores Inc. and TJX Cos. both reported sales gains that exceeded Wall Street estimates. TJX operates the T.J. Maxx and Marshalls chains.

Sale of big-ticket items soar, bolstering economy

As explained in an earlier post that compares macroeconomic policy to the story of Goldilocks and the Three Bears, the key to managing the economy is influencing overall spending on newly produced goods and services. The largest component of this aggregate demand (AD) is consumption spending. According to the August 26, 2009 article "Sale of big-ticket items soar, bolstering economy," Associated Press business writer Alan Zibel reports that spending increased significantly in July, which may indicate that the current economic recession is close to an end:

Consumers and business spend big in July, sending home, equipment and car sales soaring

WASHINGTON (AP) -- Consumers and businesses went on a big-ticket spending spree in July, sending home, car and equipment sales soaring by the largest amount in years.

The sales, detailed in two government reports Wednesday, confirmed a subtle but marked shift in confidence about the economy. New home sales jumped almost 10 percent from June, while orders for long-lasting goods like appliances, planes and computers rose nearly 5 percent in July, the third increase in the past four months.

"It looks like we've hit bottom and we're now slowly trying to dig our way out," said Nigel Gault, chief U.S. economist at IHS Global Insight.

Still, it remains unclear whether the growth can be sustained. Though the increases in housing sales and manufacturing last month were dramatic, they came from extraordinarily low levels and were fueled by temporary government programs like Cash for Clunkers and tax credits for home sales.

Most economists now agree the recession that began in December 2007 has ended or is ending. Some say the economy is poised to grow strongly in the July-September quarter, but will probably show weaker growth after government stimulus spending tapers off.

Sales of new homes surged to a seasonally adjusted pace of 433,000 in July from 395,000 in June, the Commerce Department said, providing another sign the housing market is bouncing back from the historic bottom reached early this year. Driven by falling prices, the fourth-straight monthly increase was greater than expected. Sales haven't risen so dramatically since February 2005.

While sales are still off nearly 70 percent from the frenzied peak four years ago, they are still up more than 30 percent from the bottom in January -- a big relief after a long and painful decline.

"We can stop worrying about the housing market and start playing closer attention to other issues, such as when credit will start flowing more freely," Joel Naroff, chief economist at Naroff Economic Advisors, wrote in a note to clients.

The improved outlook could help further boost the economy. As home sales rise, builders will gradually need to hire more workers to pour foundations and pave roads, reversing the trend that saw 1.4 million industry jobs shed since the recession began.

"These are crucial elements of a sustainable recovery," David Resler, chief economist at Nomura Securities, wrote in a research note.

Construction job losses have slowed recently, with 76,000 lost in July, about half January's level.

Much like Cash for Clunkers, homebuyers are rushing to take advantage of a federal tax credit that covers 10 percent of the home price, or up to $8,000, for first-time owners. Home sales must be completed by the end of November for buyers to qualify.

And there are many deals to be had: The median sales price of $210,100 was 11.5 percent lower than levels a year ago, but still up from March's low of $205,100.

Builders and real estate agents fear that the end of the tax credit could reverse the upward trend. Sen. Johnny Isakson, R-Ga., has introduced legislation to extend it for another year, raise it to $15,000 and make it available to all buyers.

If that doesn't happen, Isakson said in an interview, "the little improvement we have from awful to terrible will go away and it will go back to awful again."

Some builders are already seeing sales dip.

At A.F. Sterling Homes in Tucson, Ariz., sales fell in July because the builder said it couldn't guarantee the homes could be finished in time to qualify, said Randy Agron, the company's vice president.

"The real estate market is really a fragile thing," he said. "It's not the right time to take (the tax credit) away."

There were 271,000 new homes for sale at the end of July, down more than 3 percent from May. At the current sales pace, that represents 7.5 months of supply, which means builders have scaled back construction to the point where supply and demand are coming into balance.

A similar trend is happening in other industries across the economy.

Orders for transportation equipment, including cars, car parts and airplanes rose more than 18 percent, helping to drive the durable goods data.

A huge jump in aircraft orders accounted for most of that gain. Also, auto production improved last month as General Motors and Chrysler reopened many plants that were shut in May and June while the companies restructured and emerged from bankruptcy protection.

The Significance of Consumption

In the August 17, 2009 story "Stocks plunge as investors worry about consumers" Associated Press writer Tim Paradis provides further evidence of the significance of consumption in the global economy:

NEW YORK – Investors' rising fears about consumer spending are turning stocks into a risky investment again.

Stocks plunged and Treasury prices soared Monday as investors around the world feared that consumers are too anxious to lift the economy into recovery. The losses on stock exchanges extended the heavy selling that began Friday with a disappointing reading on consumer confidence. And bond investors, once again searching for a safe investment, bought heavily into Treasurys.

The Dow Jones industrials fell 165 points, while overseas, the Shanghai stock market tumbled almost 6 percent and the major indexes in Europe fell more than 1.5 percent.

Stocks fell across all industries as investors worried that consumers' reluctance to spend will hurt corporate earnings. Many companies second-quarter results were boosted by cost-cutting, not higher sales, and the fear is that without a pickup in sales, earnings will fall.

While other parts of the economy, including housing and manufacturing, are showing signs of progress, the country cannot have a strong recovery unless consumers are spending more freely. Their spending accounts for more than two-thirds of U.S. economic activity.

Traders got more bad news about the consumer Monday when home improvement retailer Lowe's Cos. said poor weather and cautious consumer spending caused sales to fall 19 percent in the second quarter. The company's results missed analysts' forecasts.

The market's reaction to news of a reluctant consumer had many questioning whether a five-month rally was way too optimistic. At its recent high the S&P 500 index had climbed almost 50 percent from a 12-year low in early March.

Joe Saluzzi, co-head of equity trading at Themis Trading LLC, said the market had risen too far and that the selling was warranted.

"The economics obviously don't support where we've been," he said.

Other analysts were more upbeat, saying some retreat was to be expected.

"We have come an awful long way. To not expect a sell-off after the degree of increase — I think you're dreaming," said John Merrill, chief investment officer of Tanglewood Wealth Management in Houston.

In midday trading, the Dow fell 163.16, or 1.8 percent, to 9,253.10. The broader Standard & Poor's 500 index fell 21.22, or 2.1 percent, to 982.87, while Nasdaq composite index fell 48.13, or 2.4 percent, to 1,937.39.

About 2,700 stocks fell while only 280 rose on the New York Stock Exchange, where volume came to 471.9 million shares compared with 435.2 million shares traded Friday.

The Chicago Board Options Exchange's Volatility Index, also known as the market's fear index, surged 13.2 percent Monday. The VIX rose 3.22 to 27.49. It is down 31 percent in 2009 and its historical average is 18 to 20. It hit a record 89.5 in October at the height of the financial crisis.

Meanwhile, the yield on the benchmark 10-year Treasury note, which moves opposite its price, fell to 3.49 percent from 3.57 percent late Friday.

Overseas, Japan's Nikkei stock average fell 3.1 percent as investors weren't satisfied by news that the country had emerged from recession in the second quarter. China's main market fell 5.8 percent as investors worried that stocks had risen too quickly and the government would tighten bank lending policies.

In afternoon trading, Britain's FTSE 100 fell 1.8 percent, Germany's DAX index fell 1.9 percent, and France's CAC-40 fell 2.2 percent.

Stocks fell Friday following a sharp drop in the Reuters/University of Michigan consumer sentiment index, which followed a surprisingly weak July retail sales report from the Commerce Department.

The mixed economic readings of the past several months aren't surprising. A turnaround produces mixed messages because not all parts of the economy recover at the same speed and some indicators start to show life before others.

Analysts say investors who had expected the economy would rocket higher got ahead of themselves by sending stocks up so quickly. Many economists have predicted a gradual recovery in the economy, in part because unemployment rates could remain high.

Investors are worried about consumers and unemployment because that could make it harder for the economy to return to growth. In downturns over the past 60 years, the S&P 500 index has hit bottom on average four months before a recession ended and about nine months before unemployment reached its peak.

Oil prices also extended their losses, reflecting the growing concerns about a weak economy that will curtail demand for energy. A barrel of crude oil fell $1.74 to $65.77 a barrel on the New York Mercantile Exchange.

Among companies reporting results Monday, Lowe's shares fell $1.99, or 8.7 percent, to $20.84.

The dollar rose against other major currencies, while gold prices fell.

The Russell 2000 index of smaller companies fell 14.20, or 2.5 percent, to 549.70.

The final goods approach to measuring gross domestic product (GDP)

Jay Kaplan explains the final goods approach to measuring gross domestic product (GDP) on the Colorado University website:

Unit 6 - Components of GDP - Final Goods Approach

Consumption (C)

The consumption of goods and services falls under one of the following categories:

Durable goods - The consumption of durable goods is considered similar to a consumer investment. Durable goods are purchased with the intention of keeping them for a sustained duration of time. Examples of durable consumer purchases include washing machines, refrigerators, automobiles, and toaster ovens.

Nondurable goods - In contrast to durable goods, nondurable items have a shorter life span. An example of a nondurable consumer purchase is groceries. The life span of the typical food is short, especially compared with the refrigerator (durable item) in which perishable foods are kept. Other examples of purchases that are considered nondurables include newspapers, magazines, clothing, and hats (which are always flying off with the wind).

Services - Since the 1960s the fastest growing component of consumer purchases has been the area of services. Services include medical treatment, lawyers, and dry cleaners.

Investment (I)

Businesses and corporations undertake investment activity that involves the purchase of goods which themselves assist in the production process. The categories of investment are:

Business Investment - This includes the actual purchases of goods used in the production process. Business investment includes the construction of new offices and factories, and the purchase of machinery, computers, and any other equipment used to assist labor in the production of goods and services.

Business investment counts as gross investment, which includes purchases of machinery to replace worn-out equipment. If a firm replaces one machine with another that does not increase output, then nothing is added to the nation's economy. To correct for this, net investment can be used, which subtracts out depreciation of existing capital from the gross (total) business investment made by firms.

Residential Construction - This part of overall investment tracks the actual construction of housing, not the sale of homes. A new home that is built during a given year is counted in that year's GDP, while the purchase of a previously owned house has already been counted in the GDP of the year it was constructed. In this way, only those residences that add to the overall housing stock count towards GDP.

Changes in inventories - Firms invest in inventories, which are produced goods held in storage in anticipation of later sales. Firms also stockpile raw materials and intermediate goods used in the production process. Goods held in inventories are counted for the year produced, not the year sold.

Although inventories are a relatively small portion of the overall investment sector, inventories are a critical component of changes in GDP over the business cycle. If the economy is slowing down, possibly entering a recession, the bearer of the bad news will often be an undesired accumulation of inventories. As consumers reduce their purchases, sales of goods and services slow, inventories build up, and firms slash production (laying off employees) to reduce unwanted (and costly) inventories.
This last point is worth emphasizing because of its relationship to the business cycle which will be discussed in Topic 4. Inventories can be considered a part of a group of leading indicators of business cycles. By leading indicator, we mean that changes in a variable such as business inventories can lead to changes in the future condition of the economy. To explain the linkage between changes in the level of business inventories in many economic sectors and economic growth, let us consider two cases: an undesired accumulation of inventory, and an undesired decrease in business inventories. We will look at the economy as a whole.

The economic impact of an undesired accumulation or increase in business inventories. Businesses plan ahead and forecast future sales. Based on their expectations, they stockpile inventories of goods the expect to sell in the near future. The reason is simple. Businesses want the goods available to meet customer demands or else they will lose the sale, and most likely lose it to a competitor. If there is a slowdown in consumption in many economic sectors, then many businesses will not sell as many goods as they had planned to. As a result, businesses will not sell off their inventories of goods as they had planned and inventories will accumulate.

When inventories accumulate due to a decrease in consumption, businesses respond by reducing orders of goods from producers. In turn, as producers face a cutback in demand for their goods, they will decrease output. When inventories are accumulating in many sectors of the economy, reductions in the production of goods becomes widespread, and as firms reduce their output, many workers are laid off. As payrolls are reduced, the number of unemployed swells and the unemployment rate rises. With the reduction in output, GDP growth falls and if the drop in production is sharp enough, the economy goes into a recession.

The opposite occurs with an undesired or unanticipated decrease in inventories. If demand for goods are greater than businesses had forecast, inventories will be rapidly depleted. As firms restock their inventories and adjust for a higher level of sales, they increase their production. Increases in output requires firms to employ more workers. If this is occurring throughout the economy, the unemployment rate will fall as more individuals find jobs and economic output will increase. This leads to a jump in economic growth as measured by GDP.

The surge in demand for goods and services as well as the responding hike in production and employment comes at a possible cost. As more jobs are created, incomes rise, further contributing to an increase in the demand for goods and services. The potential result is a rise in the inflation rate due to demand-pull effects. Demand-pull inflation results from price pressures caused by rising demand for a good. In addition, cost-push pressures may also lead to greater inflation. As firms increase their output and demand for labor, wages may rise, especially if the economy was already near or at full-employment. Higher wages increase production costs that may be passed on to the consumer in the form of higher prices for goods.
The important point made here is that although inventories are a relatively minor component of GDP, rapid changes from their desired levels can have important economic consequences. When inventories accumulate beyond desired levels, an economic slowdown may be on the horizon as producers reduce their output. Or if inventories are rapidly being depleted, then economic growth and possibly inflation may soon rise as wage and price pressures build. Economic analysts monitor the divergence of inventories from desired levels as a leading indicator of potential changes in future economic growth rates.

Government Spending (G)

The government sector tracks what the government actually spends money on. Government purchases of goods and services include stealth bombers, government-funded research, space shuttles, salaries, and toasters. Many of these items are seldom sold in markets; as a result, they are valued at the price the government pays for them. The calculation of government spending for GDP purposes excludes several tremendous categories of actual spending: transfer payments, which redistribute income primarily to individuals who are potential consumers, and interest payments on the debt.

Last updated January 15, 1999

Consumer spending rises in June, incomes drop

According to the August 4, 2009 article "Consumer spending rises in June, incomes drop" by Associated Press economics writer Christopher S. Rugaber:

WASHINGTON – Consumers opened their wallets and pocketbooks a bit more in June, increasing their spending for the second straight month while saving less, even as incomes fell sharply.

Consumer spending is closely watched because it accounts for about 70 percent of total economic activity. Many economists warned that despite the slight increase in June, falling wages and rising unemployment likely will keep spending sluggish for the rest of this year.

Still, the housing market continued to show signs of life as pending U.S. home sales rose in June for the fifth straight month, according to the National Association of Realtors. The group's pending home sales index rose more than expected to 94.6, from an upwardly revised reading of 91.3 in May. The last time there were five straight monthly gains was July 2003.

The Commerce Department said Tuesday that consumers boosted their spending 0.4 percent in June, slightly ahead of analysts' estimates. That comes after spending rose 0.1 percent in May.

Personal income fell 1.3 percent, the steepest drop in more than four years. Incomes rose by the same amount in May, boosted by one-time payments from the government. Economists expected personal incomes, the fuel for future spending, to fall 1 percent.

Incomes benefited in May from a one-time payment of $250 that was mailed to 50 million Americans receiving Social Security and other government benefits, as part of the Obama administration's $787 billion stimulus package.

Excluding the impact of the stimulus, personal income would have fallen 0.1 percent in June after a flat reading in May, the department said.

Wages and salaries fell 0.4 percent in June from May, the eighth straight monthly drop. That makes it unlikely consumers will ratchet up their spending anytime soon, economists said.

"The U.S. consumer will not be much of a help during the early stages of the economic recovery," Joshua Shapiro, chief U.S. economist at consulting firm MFR Inc., wrote in a note to clients.

Amid the longest recession since World War II, the personal savings rate has surged as Americans seek to rebuild their nest eggs after home values and stock portfolios plummeted last year. While saving can be good in the long run, rapid increases in saving can slow the economy.

The department said the personal savings rate fell to 4.6 percent in June, after jumping to 6.2 percent in May, which was the highest since February 1995. The rate dropped as low as 1 percent last year.

Spending may increase in July and August due to the government's "cash for clunkers" program, which has spurred thousands of Americans to trade in old cars for newer vehicles, Shapiro said. But the savings rate is likely to keep rising later this year.

Investors appeared unfazed by the economic report and focused on locking in some profits after a 14 percent climb in stocks since July 13. The Dow Jones industrial average lost about 15 points in morning trading, and broader indices also dipped.

The department also revised its spending and income data back to 1929, as it did last week when it reported second-quarter gross domestic product, the broadest measure of the economy's output. The changes show that Americans saved slightly more than previously thought.

For example, the department revised the savings rate in 2008 to 2.7 percent from 1.8 percent.

The government reported last week that the overall economy, as measured by the GDP, shrank at an annual rate of 1 percent in the second quarter, far less severe than the 6.4 percent decline in the first quarter and a 5.4 percent decline in the fourth quarter of 2008.

Sluggish consumer spending has held back the sales of food and beverage companies. Tyson Foods Inc., the world's largest meat producer, said Monday that sales fell 3 percent in its third quarter. The company posted a strong profit due to cost cuts.

And sales for MillerCoors, the U.S. joint venture owned by Molson Coors Brewing Co. and SABMiller, increased by only 1 percent in the most recent quarter, Molson Coors reported Monday.

The Leaner Baby Boomer Economy

The July 23, 2009 cover story "The Leaner Baby Boomer Economy" in BusinessWeek magazine emphasizes the importance of consumption (C) in overall spending on newly produced goods and services, which economists call aggregate demand (AD). The recession which began in late 2007 was caused by a decrease in aggregate demand as a result of the collapse of housing prices and insufficient regulation of financial markets that reduced loans.

The Leaner Baby Boomer Economy
The downturn is putting a crimp on baby boomers' free-spending ways, and the likes of Mercedes and Starwood Hotels are scrambling to keep up

By David Welch

Mercedes is the quintessential boomer brand. Drive down an American highway, and odds are good that the person piloting the Benz in the next lane was born between 1946 and 1962. And Mercedes-Benz (DAI) has prospered right along with America's huge postwar generation. Back in 1986, when the first baby boomers turned 40, Mercedes sold 99,000 cars in the U.S. In 2006, when those boomers hit 60, the automaker moved almost 250,000 vehicles, a fifth of its global total.

This year, Mercedes will sell a third fewer cars in America. In Montvale, N.J., Kristi Steinberg, who runs Benz's North American market research operation, has a nagging fear: that sales won't recover for a long time because boomers, history's wealthiest generation, are tapped out. "I don't know if anyone knows yet if this is a blip," she says, "or a defining moment like the Great Depression."

Executives such as Steinberg always knew boomers would curb their free-spending ways as they approached retirement. But not in their most nightmarish imaginings could they have predicted that an economic maelstrom would cripple the customers they have courted and counted on for 30 years.

FAITH IN RISING MARKETS
When 79 million people—nearly a third of Americans—start spending less and saving more, you know it won't be pretty. According to consulting firm McKinsey, boomers' conversion to thrift could stifle the economy's hoped-for rebound and knock U.S. growth down from the 3.2% it has averaged since 1965 to 2.4% over the next 30 years. "We would have gotten here in 5 or 10 years as boomers retire, but we pushed it up," says Michael Sinoway, managing director of consulting firm AlixPartners. "Now [companies] are scared things won't come back." And that's why everyone from Mercedes to Nordstrom (JWN) to designer Vera Wang are scrambling to remake themselves for the Incredible Shrinking Boomer Economy.

Not so long ago, boomers were never going to die. Filled with a self-confidence born of unprecedented prosperity, many thought rising markets would assure their future. If the economy faltered, well, it would rebound more strongly than ever, as it had so many times before. And so boomers spent—and borrowed—as if there were no tomorrow.

Meet Tim Woodhouse, 56. He owns Hood Sailmakers in Middletown, R.I., a business that helped finance a plush life. Woodhouse owns a boat, five Ducati motorcycles, and every few years treated himself to a new Porsche 911. He figured he'd retire when he felt like it. Then the markets crashed, the economy tanked, and suddenly Woodhouse felt a lot poorer. In April, with business slowing and his real estate holdings leaking value, Woodhouse hit the brakes. "I was scared," he says. "My net worth took a real hit." Woodhouse sold the Porsche and bought a Mini Cooper. The boat spends more time tied up these days than out on the water. He and his wife dine out less often, and they don't entertain at home much either.

Woodhouse and millions of boomers like him are doing what people normally do when they near retirement: They're living more frugally. Companies have long factored in this actuarial reality, gradually tweaking their products and marketing to appeal to the next generation. With boomers, however, many companies became complacent. It wasn't that they ignored younger consumers but that they counted on boomers to keep spending longer. And why not? Until recently boomers typically reached their spending peak at age 54, according to McKinsey. Contrast that with the previous generation—a thriftier bunch whose consumption typically peaked at 47.

Now many companies are scrambling to appeal to Generations X and Y. You can already see this thrust in the stores. Clothing designer Vera Wang is selling a casual line called Lavender aimed at twenty- and thirtysomethings. It's fashion, but not the pricey garments the company typically has sold. Meanwhile, says Wang, her namesake brand needs to get a lot less expensive. In one instance, Wang made a high-end dress using fabric that costs $5 a yard instead of $12 but used the fabric in several layers to give the garment a richer look. As a boomer herself, Wang, 60, feels her generation's pain. You don't have 30 years to reinvent yourself," she says.

Even as Mercedes continues to target boomers, it has quietly recruited 500 people aged 20 to 32 for a focus group it calls Generation Benz. Mercedes researchers are seeking their views on the economy, car ads, model designs, and more. The automaker sent 20 Generation Benzers into dealerships wearing flip-flops and other casual attire to see how much attention they received. Four of the 20 were ignored. The results, says Steve Cannon, vice-president for marketing, served as a wake-up call to Mercedes dealers "that we have to start paying a lot more attention to tomorrow's customers, especially if tomorrow is coming faster than we thought."

VALUE SHOPPING
Can younger consumers pick up the slack? Consider the demographics. Generation X, Americans born between 1964 and 1980, is generally estimated to be about two-thirds the size of the boomer cohort. And with boomers working longer, especially since the crash wiped out many retirement funds, it may take longer for Xers to move into their prime earning (and spending) years. And what about Generation Y, the 81 million-strong group born between 1981 and 1994? Right now, 14% are unemployed and will have their own hole to claw out of when the economy revives, according to Edward F. Stuart, who teaches economics at Northeastern Illinois University. In other words, companies will need boomers for years to come.

The trick will be finding a way to fulfill the needs and wants of a generation that is used to being catered to—but is now on a budget. Timothy Malefyt, an anthropologist who studies consumer trends for the ad agency BBDO New York (OMC), argues that boomers, having ridden a wave of technological change, are highly adaptable and well versed in problem-solving. (Or at least they see themselves as such.) Already, he says, they are making a virtue of value shopping, once viewed by this group as hopelessly déclassé. For many boomers it's no longer about keeping up with the Joneses, it's about outthinking them. "If you make boomers feel they've failed, you'll lose them," Malefyt says. "They want to feel they've outsmarted the system or their circumstances."

That's why some companies are coalescing around "cheap chic," a marketing conceit that has become synonymous with Target (TGT) but also has been tried by the likes of JetBlue, Ikea, and Mini. The latter is owned by BMW, another classic boomer brand. BMW didn't plan it this way, but the Mini is one solution for a company whose cars are becoming too pricey for many boomers. A fully loaded BMW 3 Series costs $40,000 plus change; a comparably equipped Mini: $25,000. The Mini, while a feat of engineering and retro style, can't compete with a BMW, which the company bills as "the ultimate driving machine." But the Mini possesses cheap chic in spades. In recent months, says BMW, fiftysomethings have been trading in their Bimmers and other luxury brands for Minis.

PAMPERING ON A BUDGET
Starwood Hotels & Resorts Worldwide (HOT) has embarked on a crash course in cheap chic—or what it prefers to call "style at a steal." The chain has long appealed to the boomer yen for luxury and pampering. Its high-end W, Sheraton, and Westin hotels offer spacious rooms, well-staffed front desks, valets, and extensive room service menus. So the polyester sheets and small-bar soap that typify the value hotel experience wouldn't do. Starwood's 40-year-old chief of specialty brands, Brian McGuinness, also knew boomers grew up challenging convention and still like to feel that they're on the cutting edge. But they also demand creature comforts. "They once drove Beetles and ended up in Bimmers," McGuinness says. "We wanted to strike that balance." Plus, don't tell them but boomers are getting older and presumably creakier. So edgy can't equal bare-bones minimalism.

After six months of research and brainstorming, Starwood came up with two cheap chic hotel chains: Aloft, named to echo the "urban cool" of loft apartments, and Element, a low-cost option aimed at people who prefer suites with every "element" of their daily lives—including spa-like bathrooms. Early last year the team mocked up an Aloft prototype and invited some boomer-age guests to stay. The mock hotel had an aggressive neon color palette, piped-in scents reminiscent of an Indian spice market, and garage band tunes on the sound system. To help bring the room rate down to the $150-to-$170 range, they cut out full-service restaurants, room service, and valets. The test subjects were fine with parking their own cars, and most said they'd rather explore and find their own restaurants than eat in their rooms. The garage music? Not so much. Starwood replaced it with contemporary rock and international music. The neon palette gave way to muted tones, and a mild citrus replaced the spice.

Starwood has opened 25 Aloft hotels so far, and McGuinness says occupancy rates meet or exceed the average in most metro markets. Starwood won't say if the downturn prompted it to accelerate the rollout of its new hotel brands. But the company is opening two Aloft hotels each month, the fastest rate the industry has seen. David Loeb, a Robert W. Baird analyst who has been covering the hotel industry for years, says Aloft's ambience may be too hip and jarring for fiftysomethings. But he says if the chain finds the right balance, it might appeal to boomers and Generations X and Y. Starwood is advertising the new chains heavily online. "Boomers and Gen Y congregate in the same places on the Web," McGuinness says.

Starwood started changing its approach to boomers before the economy went south. Other companies are adjusting on the fly. OSI Restaurant Partners has watched its eateries lose boomer customers, whether middle-class types who frequented the company's Outback Steakhouse and Bonefish Grill restaurants or wealthier people who once dined on filet mignon at the more upscale Fleming's Prime Steakhouse & Wine Bar. OSI's chief operating officer, Paul E. Avery, reduced menu prices and offered smaller cuts of beef at Outback to maintain margins before retiring in early July. The company has gone on an ad blitz pushing the more modest portions for $9.99. This is obviously a tricky balancing act at Outback, where a big slab of meat was the chain's main attraction.

The good news, says Chief Branding Officer Jody Bilney, is that people who order the less expensive entrées typically end up buying dessert or more alcohol, so the average ticket is still about $19 per person. At Fleming's, OSI is offering more wines under $10 a glass and a fixed-price menu that caps everything but drinks as low as $36 a person. Before the downturn diners typically spent $60 apiece. OSI is responding to a recession but is prepared to run its business this way if boomers remain frugal over the long run. "If anyone tells you they know that the impact of the last 12 months is permanent or temporary, they're blowing smoke," Bilney says.

Nordstrom isn't waiting to find out. The purveyor of affordable fashion believes that its customers—many of them boomers—will be under pressure for years to come. So even as it starts building fewer full-price department stores, Nordstrom has tripled the pace for opening lower-priced Nordstrom Rack stores. It will open 13 in 2009 and nine next year. Rack stores offer Nordstrom's usual name brands but for 30% to 70% less than they fetch in the main stores. Nordstrom figures boomers still want fashion, but at a discount.

What many companies are attempting to do now has worked in the past. After the crash of 1929 few people could afford a Cadillac, so General Motors (GM) created a budget model to keep its luxury sales going. The 1934 LaSalle had art deco touches, including chrome portholes along the hood. To cut costs, GM stuck the car on an Oldsmobile chassis and gave it a smaller engine. The LaSalle's cheap chic was a hit with Depression-era drivers, and when the economy recovered, Cadillac again became a totem of material success. Of course, America was about to experience the greatest boom in history. That's unlikely to happen this time.

With David Kiley

Brand Name Companies Go Bankrupt

According to a July 13, 2009 CNNMoney.com article, Brand Name Companies Go Bankrupt, what these bankrupt companies have in common is insufficient consumer demand for their products. Indeed, insufficient demand for newly produced goods and services is the prime characteristic of recessions and depressions. This is why most economists recommend the government step in and buy new products to fight economic downturns. If private consumers are unwilling or unable to purchase newly produced goods and services, the government can increase its purchases to offset the overall decline. Unfortunately, recent increases in federal government spending have been offset by substantial reduction in spending by state governments, so the total effect on overall spending (aggregate demand) has not been as significant as hoped for (and perhaps promised).

As consumers cut back, businesses are scrambling. 14 brands you know -- from an NHL hockey team to Obama's suit maker -- that are hitting the skids.

Battling for a desert hockey team

Maybe this is the comeuppance for planting a hockey team in the desert. In May, the Phoenix Coyotes filed for Chapter 11 bankruptcy protection with up to $500 million in debts and less than $100 million in assets.

After that, a hockey-worthy fight broke out between the two potential new owners: Jim Balsillie, co-CEO of BlackBerry-maker Research in Motion, and Jerry Reinsdorf, owner of the Chicago White Sox and Chicago Bulls. While Reinsdorf said he would keep the club in its adopted home, Balsillie wanted to move it back to Canada. (The Coyotes started as the Winnipeg Jets before moving to Glendale, Ariz., a suburb of Phoenix, in 1996.)

In mid-June, however, the bankruptcy judge ruled against Balsillie's $213 million bid and said the team would be auctioned off in August to anyone willing to keep the club in Arizona. But the bickering between the two sides continues.

Whoever wins, they're scoring a team that averaged fewer than 11,000 fans at each game during the 2008-2009 seasons. That left the stadium almost half empty at home games.

The president's suit maker needs a bailout

Not even having ultra-dapper President Obama as a customer could help Hartmarx. The Chicago-based clothing maker declared bankruptcy in January, just after the president wore its suits for his inauguration and election night attire.

The company listed between $100 million and $500 million in assets and liabilities, and noted in its filing a "substantial decline in discretionary apparel purchases by consumers and by the company's retail customers."

Established in 1872, Hartmarx makes business, casual and golf clothes for its own brands -- including Hart Schaffner Marx, Palm Beach and Racquet Club -- and has exclusive rights to market under other luxury brands -- including Tommy Hilfiger, Burberry men's tailored clothing, Ted Baker, Pierre Cardin and Perry Ellis.

Currently, the brands look to survive under the guidance of British equity firm Emerisque, which bid $128.4 million for Hartmarx.

Six Flags waves the white flag

The economy has been quite the thrill ride for Six Flags. The New York City-based amusement-park operator went belly-up in June, unable to spin off $2.4 billion in debt -- even on the Tilt-A-Whirl.

But never fear: The chain's 20 parks, which stretch from Montreal to Mexico City, will remain open. The Chapter 11 filing is "strictly a financial restructuring" of the company's debt, said President and CEO Mark Shapiro in a statement.

The parks attracted 25 million visitors in 2008, and the company made $275 million. "Six Flags has been a favorite family destination for almost a half century. Our financial reorganization will best position our parks to entertain millions of guests for another 50 years," Shapiro added.

Fancy soap-maker can't hold water

When you're afraid you might lose your job, triple-milled soap, $18 body lotion and aromatherapy spa treatments tend to become less of a priority. The domestic portion of Crabtree & Evelyn filed for Chapter 11 bankruptcy protection in July with between $10 million and $50 million in assets -- and just as much in debts.

The Woodstock, Conn., company was founded in 1973 and built its brand on natural products that feature herbs, fruits and fresh flowers. But as consumers watched Wall Street spiral lower, they reigned in spending on consumer luxuries. Crabtree & Evelyn's 126 stores, mostly sprinkled in malls throughout the country, have seen a sharp sales pullback.

The real-estate portfolio of the company will go under the microscope as part of its bankruptcy filing, but for now, the stores remain open. Crabtree & Evelyn also operates a Web site, which is unaffected by the filing, and distributes products to thousands of wholesalers.

Crabtree & Evelyn is owned by Kuala Lumpur Kepong Berhad, a Malaysian company that is publicly traded there and invests in a grab-bag of industries, including manufacturing, real estate and retail.

Filene's Basement dresses down

This bargain basement may have passed on a few too many deals to its customers. Filene's Basement filed for Chapter 11 bankruptcy protection in May with assets of up to $100 million and liabilities of as much as five times that amount.

The company said the credit crunch coupled with consumers pulling back made its debt burden unmanageable.

Fellow discount retailer Syms agreed to pay $65 million for the company, which was actually founded in a Boston basement in 1909. Syms bought 23 of the retailer's 25 store leases as well as its inventory -- which includes everything from Seven jeans to Prada merchandise. The stores will continue to operate under the Filene's Basement name.

Extended Stay need a refresh

uring a recession, travelers seem to be more willing to bunk up with buddies to save a buck. The long-term hotel operator, Extended Stay, filed for Chapter 11 in June, buckling under a debt load totaling $7.6 billion at the end of 2008, according to court documents.

The hotel chain, meanwhile, showed assets of only $7.1 billion at the end of 2008 with sales of $1 billion for the year. And revenues tumbled further as the recession dug in deeper: The first five months of 2009 saw revenue per available room crater by 23.2% compared to the same period the year prior.

The hotel chain is popular among business travelers who have to work away from home for more than a night, offering apartment-like conditions with fully equipped kitchen, expanded work space, wireless Internet, onsite guest laundry facilities, and pet-friendly rooms.

During the bankruptcy process, the hotel chain -- which has more than 680 properties under a handful of regional names such as Extended Stay America, Homestead Studio Suites, Studio PLUS and Crossland -- will all remain open and in operation.

Eddie Bauer packs up - again

The Washington-based clothing retailer, which is known for its mom jeans and rugged outdoor gear, filed for Chapter 11 bankruptcy protection in June.

This is the company's second spin through the courts. Its previous owner, Speigel Catalog, which bought the company in 1988, had filed for Chapter 11 in 2003. When Spiegel emerged in 2005, Eddie Bauer was spun off and became a stand-alone company for the first time since it was first acquired, by General Mills, in 1971.

"Unfortunately, a crushing debt burden left from the Spiegel bankruptcy combined with the severe, prolonged recession have left us with no choice but to look for ways to restructure the company's balance sheet," said President and CEO Neil Fiske in a statement.

When Eddie Bauer filed for bankruptcy, it claimed between $100 million and $500 million in assets, but just as much in liabilities. Eddie Bauer intends to sell the majority of its assets to CCMP Capital for $202 million, though bidding is still open.

CCMP has agreed to keep the majority of the company's 371 stores open, as well as its catalogue and Web site operations. Gift cards, however, will only be honored until Sept. 1 or the company sells its assets -- whichever comes first.