ST. LOUIS – Fresh evidence shows that high energy prices and sagging home values are pinching the main driver of the U.S. economy — the Average Joe's wallet.
Retailers and economists say many Americans are waiting to buy big-ticket items and cutting back on frills. Homeowners are shelving plans to remodel kitchens. Families are dining out less and tightening their budgets.
"People are taking funds from one area and committing them to another, gasoline and utilities in particular," said Gregory Miller, chief economist at Sun Trust Bank Inc. He predicts growth in consumer spending will fall from a rate of 2.5 percent to around 1.5 percent during the second half of this year, bringing down overall economic growth at the same rate.
At the same time, homeowners are seeing a key source of their wealth lose value as housing prices fall in some parts of the country.
Psychologically, this creates the opposite of the "wealth effect" that kept upbeat consumers spending as stock prices rose in the late 1990s and real estate boomed after the recession in 2001, said Robert Weagley, chair of the personal financial planning department at the University of Missouri.
The Commerce Department reported Thursday that new home sales fell 4.3 percent last month, while the inventory of unsold homes on the market rose to a record high and median home prices slipped between June and July.
At the same time, orders for durable goods such as cars or expensive appliances dropped 2.4 percent in July. That reflects what economists say is consumers' hesitation to buy big-ticket items in a tighter economic environment.
Several retailers have warned that the change in consumer behavior was hurting sales and have seen their stock prices slide as a result.
Home improvement chain Lowe's Cos. (LOW) warned Monday the slowing housing market will hurt its earnings for the rest of the year, its stock tumbled 10 percent this week. Shares in Williams-Sonoma Inc. (WSM) fell to a new 52-week low Thursday after the home furnishings retailer cut full-year guidance because of the slowing economy.
More than half of U.S. households said gasoline prices, which have average $3 a gallon in some parts of the nation, caused them to cut back on discretionary spending during August, according to a survey released Tuesday by the International Council of Shopping Centers. Miller and others say gas prices don't seem likely to drop significantly.
Meanwhile this week's housing numbers show that the real estate market is likely to decline further as the number of unsold homes grows, further pressuring prices downward.
"I rarely find myself in a position where a single data release really snaps my head around," Miller said. "I'm beginning to question my assumption that this housing correction will continue to occur in a controlled fashion."
So what does that mean for a small business owner like Beth Ruppel? Leftover yogurt-dipped dog treats.
Ruppel owns Wolfgang's Pet Stop in St. Louis. Customers still bring their dogs in for grooming, but they're passing on homemade treats or faux-pearl dog collars in the gift shop upstairs, she said.
"Customers are still buying what they need," Ruppel said. "But they're not buying the accessories and the other items that are not necessarily practical."
Consumers still spend freely on the things that are important to them, said Patricia Edwards, managing director and retail analyst at Wentworth, Hauser & Violich in Seattle. But when it comes to impulse buys or simple household goods, people are cutting back or buying cheaper products than before.
Mike Schwarm, a 42-year-old plumber from St. Charles, Mo., said he's cut back on taking his wife and kids to Applebee's and Romano's Macaroni Grill Inc. restaurants, from twice weekly to twice monthly. His son Samuel has been begging to go to Walt Disney World Resort this summer. The family visited a museum in Springfield, Mo. instead, Schwarm said.
The pullback was evident in Applebee's International Inc.'s results. The company reported last month that sales dropped 1.8 percent during the second quarter while profits fell 26 percent to $20.4 million. On the more affordable end, McDonald's Corp., the world's largest restaurant company, posted its strongest quarterly results in more than three years, with net income jumping 57 percent to $834 million.
Consumers tend to change their spending habits slowly when economic conditions change, Weagley said.
"Psychologically, it takes us a while to make the decision to make an adjustment, and once we make the decision it takes us a while to implement the adjustment," he said.
"A lot of people like me have an old gas-guzzling Ford Explorer, but they keep driving it because it's paid for," Weagley said. To compensate, consumers nibble around the edges, making fewer trips to Wal-Mart and compiling a list before they go, he said.
That's been the case at the eight Wal-Mart stores managed by Cindy Galati in suburban St. Louis.
Galati said customers have been ringing up bigger purchases, indicating they are bundling more shopping into each trip. That's not necessarily bad news. Galati said Wal-Mart's low-price focus puts it in a strong position to capitalize on bargain shoppers.
"It's going to be the day-in and day-out staple items that we know our customer is going to need," Galati said. "That's how we're going to drive sales through the quarter."
Wal-Mart Stores Inc. (WMT) reported its first quarterly profit decline in a decade this month. Chief Executive Lee Scott said disappointing sales were partly due to customers cutting back because of higher energy prices.
"Customers tell us they are most concerned about gas prices," Scott said in a message for investors. "This has been consistent every month this quarter."
While midpoint and discount chains are feeling the pinch, luxury retailers continue to outperform them, according to the International Council of Shopping Centers' monthly surveys of about 60 retail chains.
Luxury outlets like Tiffany & Co. and Louis Vuitton are expanding in wealthy neighborhoods like Belle Mead in Nashville, where residents are less affected by higher gas prices, he said.
Still, some of the well-heeled are tightening their belts.
"Compared to a few months ago, I'm spending less," said Niria Arvizu, an attorney who was recently shopping at a mall in downtown Los Angeles.
The 29-year-old from Marina Del Rey is saving money to buy a condo and a new car. She said she used to spend $500 to $600 a month on clothes and shoes. Now she spends about $200.
"I'm saving on luxury items, like clothes, dinners, going out," she said. "I go to the grocery store more, and bring my lunch to work everyday."
Overall, shoppers are likely to bargain hunt and put more of their income into savings accounts later this year as the housing market continues to weaken, said Stuart Hoffman, chief economist at PNC Financial Services Group.
Beyond the psychological impact, lower home values cut into consumers' ability to borrow money, Hoffman said. Since the real estate boom started, homeowners borrowed against the increased value of their houses.
Losing that borrowing power could take tens of billions of dollars out of the U.S. economy this year, although that remains a tiny fraction of overall spending, Hoffman said. The shift is likely to have the biggest effect on home improvement retailers, as people scale back investment in their houses, he said.
That's not news for David Richardson, the 50-year-old co-owner of Rothschild's Antiques and Home Furnishings in St. Louis. After two strong years of sales, business has slowed dramatically this summer.
"Look around," Richardson said, gesturing to an empty store. "I'm scared. I don't know what's the right thing to do. Do you stand by the tried and true, or do you move on?"