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Consumer spending during holiday season could answer questions about economy

| Saturday, Nov. 24, 2012, 11:38 p.m.
Jeff Petrella is co-owner/manager of Uncle Joe's Scuba in Coraopolis. According to Petrella, he has seen business fall by half this year, which is similar to what happened before the last presidential election. Keith Hodan | Tribune-Review
Jeff Petrella, co-owner/manager of Uncle Joe's Scuba in Coraopolis, says he has seen business fall by half this year, which is similar to what happened before the last presidential election. Keith Hodan | Tribune-Review

Americans have a spending problem: They're not doing enough of it.

At least, that's the view from Jeff Petrella's seat behind the counter at Uncle Joe's Scuba in Coraopolis. Customers continue to come and go as they always have, but lately, they've been reluctant to part with their cash.

“Instead of buying new equipment — mask, fins, snorkel — people are trying to make do with what they've got,” said Petrella, who opened the shop in 2007 with his father. “Industry-wide, it's very similar. A couple of (manufacturer's representatives) told me they're feeling the crunch because all of their dive shops are going through the same thing.”

As the Christmas shopping season begins during this long holiday weekend, shop owners, policymakers and economists will be watching closely to see how willing people are to spend money. The way consumers answer that simple question — to buy, or not to buy? — will say a lot about the prospects of a country struggling out of a deep recession.

Economists disagree whether consumer spending drives the economy or simply measures its health. Either way, it accounts for more than two-thirds of the nation's economic activity. The decisions people make about whether to spend or save reach far beyond their pocketbooks.

“Get 60, 70 or 80 percent of Americans (thinking) things are going to get better, and the whole world is different,” said Dennis Jacobe, chief economist for Gallup, the national polling company. Jacobe estimated that trillions more dollars could flow through the economy if people had more confidence in the future.

What could — or should — be done to entice people to spend more money remains up for debate.

“As soon as economists start talking about psychology, watch out,” said John Cochrane, finance professor at the University of Chicago Booth School of Business. “People are nervous for a variety of reasons.”

A partisan economy

Economic optimism splits along partisan lines. According to monthly polling data by Gallup, Republicans expressed more confidence about the economy than Democrats in fall 2008, as the financial sector started to collapse and the country entered its deepest recession in nearly 80 years.

By March 2009, when the job market was hitting bottom, that gap flipped and Democrats expressed more optimism than Republicans.

The difference, Jacobe said: George W. Bush occupied the Oval Office in 2008 and Barack Obama did in 2009.

That partisan gap continued throughout the past four years and began widening rapidly in August, as the presidential campaign entered its most active phase, Gallup's data show.

“The gap has just gotten huge. Part of that has to do with (the campaign) being run on whether things are getting better or not,” Jacobe said.

Asked whether the economy is improving or worsening, about 80 percentage points separate the optimism of Democrats from the pessimism of Republicans, Gallup found. Exit polls found 90 percent of people who thought the economy was doing well voted for Obama, while 60 percent of those who thought it wasn't voted for Republican Mitt Romney.

Perception and recession

Retailers say an election can act like a valve, releasing pent-up, bipartisan consumer demand just in time for the Christmas shopping season.

That's what happened after the 2008 election, Petrella said. People cut back on spending before the election, when the outcome was uncertain. But in the Christmas season after the election, Uncle Joe's Scuba sold twice as much of some high-end merchandise, such as underwater cameras, as it typically does, Petrella said.

“Then, the following year, it slowed back down a little to what has become a little more normal,” Petrella said.

Retailers hope history will repeat, beginning with this weekend's shopping spree, which kicked off with the traditional Black Friday blitz.

That is, unless Washington gets in the way.

The nation could plunge over a $600 billion fiscal cliff of tax hikes and spending cuts scheduled to take effect at year's end, unless Republicans and Democrats can agree on how to avert it.

The Congressional Budget Office warns that pulling that much money out of the economy could slow growth and leave the country vulnerable to another recession — not exactly the kind of news that inspires people to go out and spend.

The last time the country faced a partisan economic impasse like this — during the debt ceiling debate of 2011, when warnings of economic calamity abounded — consumer confidence “plunged,” Jacobe said. For Republicans, confidence dipped lower during this period than it did in the depths of the recession, according to Gallup's data.

As consumers' worries grew, people held back on purchases, Jacobe said. If the unease dragged out, the drop in spending could have ended the recovery, he said.

“The economy was generally perceived as slowing, but it broke before we got to a long enough period where the economy actually went back into a recession,” Jacobe said.

Seeking certainty

Businesses are sounding alarms about the looming crisis. The National Association of Manufacturers, the nation's largest trade association, warned in a late-October report that the United States will lose more than 6 million jobs and unemployment will spike over 11 percent in the next three years if Congress and the White House don't avoid the fiscal cliff.

The report says the economy is 0.6 percent smaller than it would be if Washington had addressed the problem.

“Uncertainty is the enemy of investment and growth. People hold off on what they have and wait to see what's going to happen,” said Allan Meltzer, professor of political economy at Carnegie Mellon University.

Less investment means fewer jobs, and fewer jobs mean less spending, Meltzer said.

“Consumer spending will depend on consumer income,” he said.

Stimulus-era policies tried to spark spending with temporary measures — such as the Cash for Clunkers car-buying program and short-term tax cuts ­— to pull the economy out of its free fall. But Cochrane and others argue that long-term stability, not short-term boosts, is what's needed now.

“Good economic policy puts in place a stable set of rules of the game and then gets out of the way,” Cochrane said.

Jacobe agreed. Money needed to fuel the next great economic expansion exists; people just aren't spending it.

“Set the rules,” Jacobe said, “and the economy will roar.”

Mike Wereschagin is a staff writer for Trib Total Media. He can be reached at 412-320-7900 or

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