Consumers aren't spending much, but the wobbly recovery won't improve unless they do.
Greg Headrick and his wife were planning a big vacation down under for the Australian Open, but the Burnsville retirees canceled after the latest market turmoil. The couple suddenly didn't feel comfortable shelling out thousands of dollars for a major trip.
"There's just too much uncertainty at the moment," Headrick said.
Such doubts, in Minnesota and across the country, are threatening the feeble economic recovery, which pivots on consumer confidence. Just how people react to the whip-saw markets of the last week and new deficit worries could mean the difference between growth and a second recession.
Will cautious shoppers hide their wallets? They were already pulling back on spending even before the latest market maelstrom. It's "the big unknown," said Lynn Franco, director of the Conference Board's consumer research center in Manhattan.
The Federal Reserve's latest report reflects the bewilderment that many are feeling. Citing deterioration in the job market and "flattened out" household spending, the Fed acknowledged Tuesday that economic growth has been less than what it had expected, predicting a "somewhat slower" pace of recovery.
Wall Street, meanwhile, offered far more drama than clarity. Following the worst day of trading since December 2008, the Dow Jones industrial average gained nearly 430 points after losing more than 600 points the day before.
The chaotic market swings are expected to clobber consumer confidence, said Chris Christopher, senior principal economist at IHS Global Insight. The Englewood, Colo.-based firm puts the probability of a second recession at about 40 percent.
"It's very hard to find a silver lining," Christopher said.
Americans, in turn, have had to become more accustomed to uncertainty. The Great Recession officially ended in 2009, but the recovery never regained dramatic momentum. Consumer spending, which had been steadily rising, dropped 0.2 percent in June -- the first meaningful decline since September 2009.
"You buy what you need instead of what you want," said Keith Johnson, a 28-year-old victim's advocate for Hennepin County. "It's a struggle for everyone -- whether you're employed or unemployed."
Consumers continue to be squeezed by slow job growth, high unemployment and largely stagnant wages. Personal income in the Twin Cities crept up 3.1 percent last year, according to new Commerce Department numbers released Tuesday, but that only put incomes back where they were in 2008.
It all spells caution for consumers, analysts say.
Thomas Wortman, a St. Paul resident catching a bus in downtown Minneapolis on Tuesday, said he and his wife are "definitely holding back." Wortman was recently laid off his job as an administrator with Minnesota State Colleges and Universities.
"My wife makes enough money for us to survive, but we're curtailing our vacations [and] eating out," he said.
Still, he was upbeat about the future and expects the economy to bounce back sooner rather than later. He recently landed a part-time teaching position. "If we were to despair, then we might not ever crawl out of this hole," he said.
Steve Wahlstrom, a 47-year-old union construction worker in Anoka, said he has been saving, particularly with a daughter headed to college soon. He thinks people are over-reacting to the stock market mayhem. "The economy is always full of highs, lows, lefts and rights," Wahlstrom said.
Michael Niemira, chief economist at the International Council of Shopping Centers, said he is more concerned about the reactions of high-end consumers who are more vulnerable to the stock market and who drive spending. Households in the top fifth of incomes account for 40 percent of consumer spending, Niemira noted.
'Choppy is not good'
While he doesn't foresee another recession, Niemira said consumer spending could get extremely choppy, and "choppy is not good."
"We're going to have to wait, watch and worry," Niemira said.
Some employers are doing the same.
Steve Wise, chief financial officer and one of the owners of Cass Screw Machine Products Co. in Brooklyn Center, said his company's mood is "a little grim right now." The company, which supplies parts for major manufacturers such as Toro Co., Bobcat Co. and Polaris Industries Inc., has rebounded from the recession, when it lost one third of its workforce. It's profitable now and cash flow is good, he said, having hired 12 people this year.
But the turmoil of recent days is feeding fresh worry.
"It pulls the reins back on raises, bonuses and we take another look at our benefit structures and hiring," Wise said. "Unfortunately, unless we see firm orders from our good customers, we're not going to be hiring."
As for the Headricks, who had big plans to go to Australia, they're reconsidering how to use the money that they had set aside for their trip.
Perhaps, despite the up-and-down market, they will buy some stock.
"Right now," Headrick said, "It may be a better opportunity to invest rather than spend."