Awaiting recession, wallets tighten

Economists and politicians can debate about whether the nation is sliding into its first recession in nearly seven years. To Chuck Rizzo, the picture already is clear.

He was recently laid off from his customer-service job at a home builder in Sarasota, Fla. Moreover, his grocery bill is higher nowadays, and he can barely afford his mortgage payments.

"Everything has gotten tremendously more expensive," said Rizzo, 45, who is married with a 15-year-old daughter. "We don't go out to dinner now. We don't take vacations. We've had to make a lot of adjustments to our lifestyle."

The official designation of a recession - usually defined as two straight quarters of a drop in the gross domestic product - comes long after the downturn itself begins. In fact, the point at which a recession officially begins is mostly an academic debate.

"That's not going to make a great deal of difference to people's economic well-being or their pocketbooks," said Frank Lichtenberg, a professor at Columbia Business School in New York. "The idea that if you're on one side of the line you're in a recession and if you're on the other side you're fine - that's not really the case."

In the 2001 recession, investors took the biggest hit from collapsing technology stock prices. This time, consumers may bear the brunt of the pain as inflation and energy prices boost daily living costs uncomfortably.

The current economic slide began about a year ago, when the housing market, pumped up in part by mortgage loans that were easier than ever to obtain, went from boom to bust. The real estate and home-construction markets collapsed, loan defaults and foreclosures proliferated, and damage has continued to spread through the nation's financial system.

Experts warn that even quick action from Washington on an economic-stimulus package could be too late.

This is one potential scenario, built from precedent, recent corporate developments, economic indicators, and interviews with economic and business experts:

Consumers would continue to pull back, with troublesome results for retailers and companies. Housing prices, which have fallen an average of 8 percent nationwide and as much as 40 percent in some markets since peaking in 2005, would drop for another year or so.

Unemployment could climb an additional two points to 7 percent, which would be the highest in 16 years and leave three million more Americans out of work. And stock prices could keep dropping.

Of course, tougher times may mean opportunities for some people. House hunters with cash on hand and respectable credit scores would likely be able to take advantage of cheaper prices. Hardware stores and auto-parts retailers tend to see sales rise when more cash-conscious people attempt their own home improvements and hang on to cars longer.

Overall, however, there are far more losers.

Affluent shoppers have joined low- and middle-income consumers in pulling back, so corporate results have suffered everywhere - for example, upscale jeweler Tiffany & Co., high-end department store Saks Inc. and low-priced chains such as Sears and Kmart stores.

Also, more people are having trouble paying their bills. AT&T said recently it was disconnecting more phones because of delinquent customers. American Express Co., whose customers are generally affluent, said it expected slower spending and more missed payments on credit cards throughout 2008.

Anecdotal reports suggest consumers are paring where they can - putting off a teeth-whitening, perhaps, or trying to wring a few thousand more miles out of an old car before trying to replace it.

On the business side, financial-services companies such as Citigroup Inc. and Merrill Lynch & Co. Inc. have been battered at the front edge of the storm. Those two posted a combined $20 billion loss for the 2007 fourth quarter.

Automakers are suffering, too: U.S. new-car and light-truck sales fell 415,000 vehicles, or 2.5 percent, to 16.1 million last year, according to Ward's AutoInfobank.

The downturn also is taking a toll on city governments because revenue from property taxes will decline along with home values.

Small businesses are also feeling repercussions. In Sedona, Ariz., some galleries and restaurants have closed because tourists are spending less, said Mary Schnack, whose business, Up From the Dust, sells imported jewelry, purses and home decor made by women in developing countries.

Schnack said her sales were down sharply during the holiday season as customers bought items only as gifts, not for themselves.

"They don't say it's because the economy is bad," she said. "But I know that's the reason."