The Battered American Consumer: Even the Upper-Middle Class Is Feeling Economic Pain

Bad news continues to batter the American consumer, from negative home equity to weak retail sales and rising claims for unemployment benefits.

One in 3 homeowners who purchased homes since 2003 now owe more than what the property is worth, according to Zillow.com, an Internet service that values more than 80 million homes. The numbers are even more dismal for those who bought in 2006, with 45 percent now experiencing negative home equity.

Equity holdings by households offer no cushion, falling a stunning 41 percent in value for the first quarter of 2008, according to the Federal Reserve's Flow of Funds Report.

Announcements of Wall Street layoffs, bankruptcies of major US retail outlets, and even the decision by Starbucks to close 600 outlets has agitated Americans regarding their future employment.

Reflecting the collapse in housing and equity values, household net worth has dropped for two consecutive quarters, as consumers increasingly depend on credit cards and consumer loans to maintain their lifestyles.

Growing numbers of economists believe that America is now in a transformational economy, where consumer spending may play a lesser role, as households belatedly recognize the need to "right size" their lifestyles. For many families, comparison shopping has become an essential practice.

The mood of economic unease has encouraged even the wealthiest 10 percent of Americans to reconsider their spending, which in 2006 represented 1 out of every 4 dollars spent. The Harrison Group, a market-research consultancy firm, and American Express Publishing found in a June survey that 80 percent of these higher-income households are now looking closely at spending, up from 68 percent in April.

"Even the upper-middle class -- with disposable incomes of $100,000 ... are fearful for their future and concerned whether they can weather the economic storm, continuing to live the lifestyle they are currently enjoying," says Burr Brown, vice president at Harrison. "They have become savvy consumers, looking for value." The survey found 82 percent now waited for sales before buying preferred-brand products.

One sign of thriftier times: IKEA, the Swedish home-furnishings retailer, has grown from 15 stores in 2003 to 35 stores in 2008, recently opening its first US factory and two distribution centers. "IKEA is broadening its customer spectrum with growing numbers of higher income families," says Joseph Roth, the firm's director of public affairs.

Crystal Clayton and Dan Williams, an engaged couple, both IT professionals from Bowie, Md., are regular customers.

"We get the style without spending the money," says Ms. Clayton, joking, "IKEA allows me to have champagne tastes on a Coca-Cola budget." Dan is pragmatic in explaining his more mass-market shopping behavior. "I like to watch my money so that 10 years from today, we have reached our financial goals," he says. "It's a simple return-on-dollars issue for me."

Smart consumers should accept that the economy's challenges are long term, calling for a major downshift in spending. Current borrowing and debt levels are unsustainable. Recognizing the economy's new challenges, spending less will become a necessity. Consider taking the following steps:

• Recalculate your net worth, given adverse housing, employment, and investment realities. This can help you avoid overextension based on a too-rosy view. Check out a net-worth calculator at Bankrate.com.
• Redefine your long-term financial goals for savings, healthcare, education, and homeownership assuming continued economic volatility -- and keeping in mind rising outlay requirements on many fronts. For more information on specific important topics, visit MyMoney.gov.
• Set lifestyle priorities, opting for a life with fewer consumer goods. Separate needed purchases from impulse purchases. See discussions and tips at TotallyFrugal.com.
• Challenge your friends to join you in "value added" activities -- local and low-cost, or free -- that do not require you to purchase anything. Search at Free-Attractions.com.
• Visit secondhand stores or discount retailers and delight in your new "return on dollars" philosophy.
• Embrace this downsizing mentality -- it's the new "cool."