Posted on Thursday, October 7, 2010
Middle Class Slams Brakes on Spending
BySARA MURRAY WSJ
Middle-class Americans made their deepest spending cuts in more than two decades, slashing
spending on such discretionary items as restaurant meals and alcohol during the recession.
Households in the middle fifth of the population sliced their average annual spending to $41,150
in 2009, the Labor Department said Tuesday in its annual spending breakdown. That was down
3.1% from 2007 and 3.5% from 2008, the steepest one-year drop since records began in 1984.
The drop came even as those households' after-tax income remained relatively stable over the
two years, at an average $45,199.
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How the recession has changed Americans'
spending patterns from 2007 to 2009
Audio: class cuts spending Meanwhile, the poorest Americans spent more
as prices for necessities like food and rental
housing climbed. Spending rose 5.6% from 2007 to 2009 for the poorest fifth of consumers, the
most of any other income group, despite a 5.5% drop in after-tax income to an average $9,956 a
household. In some cases, elderly people and others with low incomes dipped into savings or
relied on credit to get by.
"What you're looking at here is people at the bottom trying to hang on," said Timothy Smeeding,
public affairs professor and director of the Institute for Research on Poverty at the University of
Wisconsin in Madison. "You can't go below a certain leveL"
Average annual expenditures for people in all income groups dropped 2.8% from 2008 to 2009,
the first spending decline on record. The numbers don't account for inflation, which has been
significant in some areas such as food and rent. One consistently rising cost for all income groups
was health care, where spending rose 9.6% from 2007 to 2009 as the cost of care climbed.
"I've become a lot more cautious," said Doug Pendery, who owns a small Cincinnati-based
plastics manufacturer and considers himself somewhere in the middle to upper-middle class. He
said he has seen health care and taxes eat up a larger share of his income. "You're really not
saving more," Mr. Pendery said. "You'd like to (butJ your expenses and everything else continue
to go up."
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Middle-class households reined in spending
mainly on discretionary items. On average, from
2007 to 2009, they cut spending 20.1% on
alcoholic beverages, 15.2% on clothing, and 9.5%
on restaurants and other food away from home.
They also spent less on some groceries, cutting
back on items such as fresh milk and cream, as
well as seafood.
Some of the change in spending could reflect a shift to cheaper alternatives, such as picking
McDonald's over sushi. Still, the relative austerity reflects a broader retrenching among
consumers spooked by high unemployment and a sharp drop in the value of their homes and
The lowest earners spent 15.4% more on food last year than in 2007, shelling out more for
cereals, meat and processed vegetables. Since many in the lowest income group may already rely
on discount shops and make few discretionary purchases, it can be difficult for them to scrimp.
Among the poor, rent expenditures increased 5.3%. Those who managed to stay in homes they
owned saw their mortgage payments rise 27.8%, suggesting that policy makers' efforts to reduce
mortgage-debt burdens aren't reaching the most needy. Across all income groups, mortgage
payments were down 7.6%.
Judy Sheppers, 69 years old, said she was doing her best to get costs down. Laid off as a
receptionist at the end of 2008, Ms. Sheppers relies mainly on monthly Social Security of $1,422,
which will put her in the lowest income group when her weekly $133 unemployment benefits run
Ms. Sheppers said her group of friends in Aiken, S.C., who used to meet for cocktails and dinner
every couple weeks, has created a more cost-friendly routine now.
"We've started doing more at-home entertaining, pot-luck-type things," Ms. Sheppers said.
"Everyone brings a dish and someone brings a bottle of wine. In a way, that's nice."
Even the richest fifth of consumers responded to the recession by closing their wallets. Their
spending fell 2.6% from 2007 to 2009.
"While their incomes are stable, their assets have declined," said Luigi Pistaferri, an economist at
Stanford University in Palo Alto, Calif. "They're waiting to buy the boat or the expensive
watches," and trying to rebuild wealth instead.