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Economy Squeezes Consumers, Business

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By DAVE CARPENTER, The Associated Press

Published: January 22, 2008

Economists and politicians can debate all they want about whether the nation is sliding into its first recession in nearly seven years. To Chuck Rizzo, the picture is clear.

Rizzo was recently laid off from his customer service job at a Sarasota homebuilder. His grocery bill is higher today, and he can barely afford his mortgage payments. "Everything has gotten tremendously more expensive," said Rizzo, 45, married with a 15-year-old daughter. "We don't go out to dinner now. We don't take vacations. We've had to make a lot of adjustments to our lifestyle."

Whether a recession is on the way - or is here - U.S. consumers and businesses are increasingly squeezed by a downturn that threatens to spread the pain felt everywhere from the gas pump to the unemployment line. The official designation often comes long after a recession begins.

"The idea that if you're on one side of the line you're in a recession and if you're on the other side you're fine - that's not really the case," said Frank Lichtenberg, professor of business, finance and economics at Columbia Business School in New York. "Clearly, we are in a very difficult period."

In the last recession, in 2001, investors took the biggest hit from collapsing technology stock prices. This time, consumers may bear the brunt of the pain as rising inflation and sky-high energy prices boost daily living costs uncomfortably.

The current slide started when the housing market, pumped up with the help of loans that were easier than ever to obtain, went from boom to bust.

Real estate and home construction markets collapsed, loan defaults and foreclosures proliferated and damage has spread through the nation's financial system.

The double punch of a punctured housing market and oil that topped $100 a barrel has slowed growth of the world's largest economy to a crawl.

Also, tightening credit and other worrisome trends may make things worse in 2008 before they get better. The question now is: How bad will it get?

There is little consensus on the consequences if a full-blown recession - defined as an outright contraction of economic activity and employment lasting at least six months - develops.

Fed, Congress Play Key Roles

The effect will depend in part on how aggressively the Federal Reserve cuts interest rates and whether Democrats controlling Congress can reach a quick accord with President Bush on an economic stimulus plan. However, experts warn quick action from Washington may be too late.

A potential scenario, built from precedent, recent corporate developments, economic indicators and interviews with economic and business experts:

Consumers will still pull back, with troublesome results for retailers and companies.

Housing prices, which have fallen an average of 8 percent nationwide and up to 40 percent in some areas since peaking in 2005, will drop for another year or so.

Unemployment could rise another 2 percentage points to 7 percent, which would be the highest in 16 years and leave 3 million more Americans out of work, and stocks could keep falling.

For some, tough times may mean opportunities. House-hunters with cash and respectable credit scores will likely be able to take advantage of cheaper prices. Hardware stores and auto parts retailers tend to see sales rise when more cash-conscious people try their own home improvements and keep cars longer. Foreign investors may find U.S. assets more affordable as prices drop, especially if the dollar continues to weaken.

All Will Feel Pain

Overall, the picture has far more losers than winners. "All of us are going to feel the pain to a greater or lesser degree," Lichtenberg said.

Americans are spooked by the current prospects of the economy. Consumer confidence sank to the lowest level in at least six years this month, according to the RBC Cash Index, amid worry over jobs, energy bills and home foreclosures after the jobless rate hit a two-year high of 5 percent in December.

Consumer spending, the fuel of a majority of the economy's output, has slowed dramatically recently, as seen in the unexpected 0.4 percent slump in December's retail sales reported by the government on Jan. 15.

Carl Steidtmann, chief economist at Deloitte Research, this month forecast a decline in same-store sales this year at the nation's retailers - the first since the recession of 1991.

More people are having trouble paying bills.

As people are pinched by rising food and fuel costs and jobs harder to find, they heap more debt onto credit cards.

On the employment scene, hardest-hit job losses include real estate brokers, financial services sales agents, loan counselors and public relations specialists, recent government figures show.

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