Are American consumers too strapped to spend?

The call has gone out for Americans to shop the economy into recovery.

With Tuesday's announcement of the steepest interest rate cut in more than two decades and President Bush and congressional leaders showing rare unity working on a tax rebate that could reach $1,600 for couples, U.S. officials hope a little extra cash in everyone's pocket will quickly pass through to the nation's struggling economy. Consumer spending accounts for 70 percent of the domestic economy.

Americans have shouldered this patriotic duty for at least seven years. But whether they're still up to the task remains to be seen.

Many U.S. consumers are tapped out -- over-mortgaged and over-borrowed with no savings to fall back on. The homes that helped finance their spending sprees are now falling in value, and higher food and energy costs are digging deeper into their wallets daily. Increasingly, they're falling behind on mortgage and car payments as well as credit card bills.

But there's something more, and it's new, said Jerrold Peterson, economics professor emeritus at the University of Minnesota at Duluth. It's fear.

"For every one mortgage foreclosure there are four of us saying, 'There but for the grace of God go I,'" Peterson said.

"As I see houses repossessed, and home values go down and down, am I really going to want to buy an automobile, or even a whole lot of new clothes?"

After world markets plunged Monday amid concerns that the United States was headed toward a recession that would spread around the world, the Federal Reserve Bank announced a ¾-point drop in the federal funds rate, down to 3.5 percent. That helped salvage markets at home as well, as an early 464-point slide in the Dow Jones Industrial Average recovered to a more respectable 128-point drop.

Meanwhile, President Bush last week proposed an economic stimulus package of up to $150 billion, composed of tax breaks for business and consumers. Details are still being worked out, but individuals could see tax rebates this spring of $800 while couples would get $1,600.

The interest rate drop could encourage spending because the rates of many consumer loans are tied to it, including most credit cards. The president's hope is that Americans will go out and spend any rebate check that comes their way.

Both strategies have worked before, some economists said. A series of rate cuts by former Federal Reserve Chairman Alan Greenspan, and a tax rebate in 2001, kept the economy strong after the Sept. 11 terrorist attack that threatened serious panic.

Don't count out the American consumer's resilience, said Michael Englund, chief economist at Action Economics, a Colorado-based market consulting firm.

"They just plowed through 2000 and 2001 like nothing happened, even though the average consumer got much poorer in the 2001 market drop than they did now," Englund said.

'Too little too late'

But at least some consumers shopping at a Cub Foods store in Minneapolis say times have changed.

"I'd rather see a break in my health premiums than a cut in interest rates," said Bonnie Herringshaw, 57, of Minneapolis. "This won't be enough to make a difference in my life." She will use any money she gets to help pay down a $1,500 credit card bill, including some health care bills.

"It's too little too late," said William Schroyer, a tree trimmer for the city of Minneapolis. "The ideas that consumers can spend our way out of this is ridiculous."

At least some economists now agree with them. "All of a rebate won't go to spending," said Robert Hammer, CEO of R.K. Hammer, an investment banking company in Los Angeles. "There will be some, but others will put it in savings for a rainy day, or pay down bills they otherwise couldn't have."

Indeed, more Americans -- some 34 percent -- intend to cut their spending, according to a national survey reported last week on Cardtrak.com, which tracks the credit card industry. That's up from 21 percent six months ago. Also, 57 percent said they will try to reduce their debt and save more money.

That could be out of necessity. Delinquency rates for the major credit cards stood at 5.01 percent in December, up from 4.44 percent a year earlier, said Robert McKinley, president of CardTrak.com. At the same time, average balances neared $10,000 last year, up nearly $400 in a year.

Even Target Corp. has seen the problems. The Minneapolis-based discount retailer wrote off 6.84 percent of its charge receivables in December, a 20 percent increase since August.

McKinley expects some boost from the government policies.

"When you look at all the variable-interest loans tied to it, it's going to be good all around," he said. Any tax rebate would be "a plus," he added.

Staff writer Chris Serres contributed to this report. H.J. Cummins • 612-673-4671