Column: We don't have much cash left for the good stuff

By Robert Trigaux, Times Business Editor
In print: Sunday, May 4, 2008

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"Like most other retailers and restaurants, we are experiencing a downturn in customer traffic, demonstrated in reduced frequency of customer visits, that we believe ties to a real reduction in consumers' discretionary spending habits."

— Starbucks CEO Howard Schultz, April 30

"Put differently, more take-home pay is needed to buy necessities, leaving less to spend on things consumers want to buy."

— Mark Vitner, Wachovia senior economist, May 1

Discretionary spending. We're going to be hearing that phrase a lot in the coming months.

That's because most of us are under pressure, mostly from fast-rising gasoline and food prices, to reduce our discretionary spending. And by that I mean the money we have left to spend after we pay for must-have stuff like rent or mortgage, food and electricity, gasoline and water.

Sorry, Starbucks CEO. That means fewer folks buying your expensive Double Chocolaty Chip Frappuccino Blended Creme.

The pullback in spending —dare we call it reluctant thriftiness — goes way beyond skipping fancy 14-syllable drinks. Consider Friday's record area average gas price of $3.593.

The latest retail victim to fall into bankruptcy was Linens 'n Things. There will be other stores hurt as consumers shrink discretionary spending.

Look at the extraordinary shift in car-buying behavior. Ten years ago, people could not get enough of the sport utility vehicle; just one in every eight vehicles sold was a small car. Last month, about one in five vehicles sold in this country was a compact or subcompact.

Consumers facing little in wage gains are putting close to 57 cents of every dollar they spend into "core" needs such as housing, medical care, food and transportation, says Wachovia economist Mark Vitner. That leaves 43 cents — a record low — out of each dollar to spend on other items.

So how have our spending habits changed in the past year?

• We spend way more (28 percent) on gas but less (3.8 percent) on motor vehicles.

• We spend more on food at home (5.3 percent) but less on clothing and shoes (1 percent) and furniture (0.3 percent).

• We spend far more on medical expenses (20.3 percent), on average, than we do on housing (14.3 percent).

"Industries that cater to discretionary spending are taking a hit," said Gus Faucher, director of macroeconomics for Moody's economy.com. That includes airlines, which, he says, may see reduced leisure travel as a result.

Of course, cutbacks in discretionary spending are not just hitting consumers. Federal, state and local governments are slashing budgets just as corporations are selectively trimming jobs and cutting costs.

The historical U.S. solution to less discretionary income? Borrow more. Consumers do it using credit cards. Lately, we do it as a nation by borrowing from China.

Eventually, we may hit our limit. Many families borrowed against the equity in their home to sustain their modern lifestyles. Now 9-million homeowners (soon to be 14-million) have negative equity in their houses. That means they're tapped out.

And they have lost any discretion to spend.

Robert Trigaux can be reached at trigaux@sptimes.com.