More from the crystal ball

What we started yesterday continues today ... here is the second part of business writer Phil Perry's 2009 economic forecast story "Negotiating the economic maze." If you're not sure what the heck I'm talking about, this is the post you want to start with.

Consumers pull back
Shed a tear for the consumer borrowing and spending that has driven the economy in recent times. “Five years ago consumer spending represented 65 percent of our economy,” says Simson. “Today that figure is 70 percent. The reason for the increase has been the availability of excess credit. Now we are seeing that availability being reduced. As a result we will see a pullback of consumer spending on discretionary purchases.”

Rising unemployment will only add to consumer angst. “We are looking at continuing job losses into the summer of 2009,” says Scott Hoyt, senior director of consumer economics at Economy.com.  “Job gains in the second half of 2009, given a growing labor force, will be insufficient to keep the unemployment rate from rising.” The unemployment rate is expected to grow to 7.7 percent by the end of 2009 from the current level of 6.5 percent.

Job losses, of course, are clearly a negative when it comes to household income. Total wages in the country are expected to rise 2.5 percent in 2009, according to Economy.com. That moderation from the 3.6-percent increase of 2008 should put further downward pressure on sales, especially at retailers. “Consumers who don’t have jobs or who are concerned about losing them will be cautious shoppers,” Hoyt says. At the same time, the rise in unemployment is not expected to be great enough to cause a decline in labor costs for employers.

When incomes are under pressure consumers tend to find alternative sources for pocket cash. Unfortunately, these sources are also drying up. “Obviously there are no capital gains around anymore,” he notes. “And there is no more appreciation in home equity, which people have borrowed against in the past.” Indeed, borrowing any kind of money is more difficult now, even for consumers who have always paid their bills on time. Even credit card companies are tightening up. “Given current trends in the economy it’s hard to see where consumers will get money to spend,” says Hoyt.

All of these factors are coming together to dampen enthusiasm. “Consumer confidence is clearly very weak right now,” Hoyt says. “We had been hoping for some improvement because of lower energy prices, but with the recent events in the financial markets we are no longer convinced that confidence will improve until well into 2009.”

Shoppers are expected to cut back in particular on high-ticket goods. “There is going to be a slowdown in luxury items as well as in expensive things that people will opt to repair rather than to replace,” says Marilyn J. Holt, a Seattle-based management consultant. Holt points to her local hardware store, which recently removed a line of expensive toilets from display. The substitute? A $19.95 toilet repair kit.

Stick with us. We'll bring you part three of this story Friday morning.