First Stop - Discretionary Spending

With most house-ATM's getting shut down and prices rising on food and gas people are cutting back on everything they can. The first cutbacks are in discretionary areas. This article from the Orlando Sentinel discusses how consumers are changing their spending habits. This chart by Elizabeth Warren illustrates how even though income has risen discretionary income has actually declined.

These are inflation adjusted dollars - and even though families are making more money - there is less flexibility to change our discretionary dollars. Two notes before progressing - the families fixed costs today are more than the entire income of the single income earner. While the fixed income used to be approximately half of ones income, now it has reduced to about one-quarter. For more reading on this topic check out here, here and for a very in-depth discussion here.

Now on to the Orlando Sentinel article -

Prices are rising in the U.S., in some cases rapidly, and it couldn't come at a worse time for many Americans worried that the slowing economy is in recession. People's efforts to build a savings cushion or pay down a costly credit line are thwarted as they struggle to fill their gas tanks and stock their pantries.

... People are cutting back where they can, diverting the money they have to cover essentials.

... "I can't imagine how some making minimum wage can even afford to fill up their car," [Cynthia Maul, a Port Orange mortgage broker] said. "People's wages aren't keeping up anymore. Who do we blame for this, and how do we change it? All I know is that it is very, very tough."

... "If you are on a fixed budget, you have to continue buying food and energy," [Lakshman Achuthan, managing director of the Economic Cycle Research Institute] said. "You can't put those purchases off for six months. But you can wait on a flat-screen TV, and you make your car last longer."

That poses a big problem for car dealerships, appliance stores, restaurants and other purveyors of what economists call discretionary goods. Wages are generally flat, the unemployment rate is edging higher, and home-equity credit is drying up.

... "Either profits will go through the floor or prices will rise," [Dean Baker] said. "This will be a tough time for a lot of people."

This will be a tough time for a lot of people... and it looks like it will get significantly tougher before it gets better. Most analysts have have been declaring things will not improve until next year. These forecasts are probably stated because they are the most optimistic forecasts of the current data. Things look like they will get tougher and tighter well before there are any improvements. Reading Elizabeth Warren above one can see how so many people were balancing on a tightrope for so long. The safety nets are long gone, and the falling has just begun.