When economists debate whether the U.S. is in recession, they calculate the thousands of lost jobs and the huge cost of mortgage foreclosures, but Felippa Janik counts cookies and pies.
At family-owned Janik’s Cafe in Wicker Park, customers who used to order smoothies with their sandwiches now drink water. People are skipping pie, cookies and cake. By midsummer, receipts had dropped 30 percent from last year, and they’ve stayed down.
More Top Picks Pool Vacuum
“I guess people are just afraid,” Janik said. “When it comes on the news that the economy is really bad, or people are losing homes to foreclosure, they worry about what’s going to happen to them.”
The once-hot economy has screeched to a sluggish, uneven idle. A sharp rise in joblessness, no growth in retail sales, a crisis in the housing market and skyrocketing oil prices have jolted consumer confidence and given the stock market the jitters.
Still, many economists don’t want to declare a recession, even after news last week that the service sector, comprising two-thirds of the economy, shrank in January. The economy still has not experienced two consecutive quarters of a decline in economic activity — a standard litmus test. And some hope the $168 billion stimulus package passed by Congress last week will boost consumer confidence, though the impact of rebates for individuals and tax breaks for business will not be felt for months.
“We don’t have a sign of even one quarter of decline,” said John Elliott, dean of the school of business at Baruch College. “We’re still prognosticating. The trouble is, so many things can be self-fulfilling. If everyone believes we are in the direst of circumstances, then everyone pulls back, and it becomes true.”
Indeed, to many American consumers and business people, the technical argument completely misses the point. Experience tells them the economy is in dire straits, whether it qualifies for the R-word or not. The most important challenge now is to learn to cope after years of easy credit, antigravity home prices, jobs aplenty and money seemingly growing on trees.
“I’m sick of all this talk about ‘Are we in a recession? Aren’t we in a recession?'” said Cherry Vujevich, owner of Chicago Fastener, a manufacturing company based in southwest suburban Mokena, where sales fell 15 percent last year.
“I keep saying, ‘Why didn’t someone ask me?'” Vujevich said. “I would have told them last year.”
In reaction, Vujevich has begun renegotiating prices for raw materials she buys, turning around orders more quickly to enhance cash flow and accepting orders she once considered too small to bother with.
Thinking twice
For Michael Valentis, an executive at a suburban home builder, the change in outlook is as simple as the worn-out soles on his Bruno Magli shoes, and the personal effort required to keep his Lexus and Infinity cars clean.
In heartier times, Valentis would have just bought a new pair of shoes. He paid $12 for a hand car wash without thinking twice. Not anymore. The shoes will get new soles, and he drives across town to his car dealer, who washes the cars for free. When it came time to buy a new computer monitor, he picked up a refurbished one from Dell.
“We’re just being more intentional about our spending habits,” Valentis said. “Where it used to be a lot easier to say, ‘That looks nice, I’ll buy that,’ now it’s like, ‘Do I really need that?'”
Take a look at the latest run of economic statistics, and it’s obvious that more and more people just say no. Sales of new homes are down 40 percent from the rate a year ago, and off nearly 60 percent from their 2005 peak. Thanks in part to the collapse of the subprime mortgage market, prices have dropped nearly 8 percent in 20 markets tracked by Standard & Poor’s.
When unemployment jumped to 5 percent of the workforce in December, it was the steepest one-month increase since the aftermath of the Sept. 11 terrorist attacks. The economy is creating new jobs at the slowest rate in five years.
The latest downbeat news came with last week’s report on the service sector. A key index of non-manufacturing businesses compiled by the Institute for Supply Management fell to its lowest point since the 2001 recession, 41.9 in January, down from 54.4 in December. Any measurement below 50 signals contraction.
Jane Zweig, owner of a Baltimore-area telecommunications consultancy, said the concern about the economy is palpable.
“I think people are nervous,” she said. “I don’t think the joyfulness is there in terms of spending. The world is just a heavier place.”
Although Zweig’s business is still strong, she has curbed her spending habits. Resisting the urge to throw grocery items in her basket she does not immediately need, she is trying to cut her Costco bills in half.
With gas prices above $3 a gallon, she has stopped driving 30 miles to her favorite upscale mall and shops locally instead. “It used to be a no-brainer, because that’s a really good mall,” she said of the shopping mecca she no longer visits.
“What has been remarkable is the speed with which things have changed in the last couple months,” said Ian Shepherdson, chief U.S. economist of research firm High-Frequency Economics.
Weak retail performance
The U-turn has been particularly obvious in the retail sector, he said. The 2007 holiday season was the weakest retail market in five years, with sales showing no growth from 2006. Only discounters such as Target and Wal-Mart showed any gains.
“As a general principle, when people are miserable, they spend less,” Shepherdson said.
For Patrick Byrne, chief executive of Salt Lake City-based Overstock.com, the breakdown in retail has created a windfall opportunity: An extraordinary amount of product coming from manufacturers and retailers who can’t sell their goods, and penny-pinching customers in search of bargains.
During the holiday season, calls into Overstock.com from manufacturers and distributors looking to dump excess inventory were up more than 30 percent from last year’s levels. The calls started in October, far earlier than usual.
“I don’t want to beat my chest and say, ‘The economy is down, so great handbags are coming my way.’ But that’s what’s happened,” said Byrne.
One of the biggest hits to the economy, one that has led shoppers to keep their handbags clasped shut, is the collapse in the housing market. Not only have home prices and sales rates declined, bursting a bubble blown with the hot air of cut-rate financing, but there is more housing trouble down the road.
Even homeowners who do not go into foreclosure still will suffer losses caused by those who do. Shock waves from foreclosures will erase $202 billion of property value from neighboring properties, according to the Center for Responsible Lending.
Preparing, adjusting
More Top Picks Best Truck Steps For Tall Lifted Trucks
Business is affected by the housing market — everything from real estate agents to furniture stores to toolmakers. At Greenmaker Building Supply on Chicago’s Northwest Side, owner Ori Sivan called employees to an emergency meeting last week in which he put the firm’s 11-person staff on “high alert.”
In recent weeks, Sivan has seen two vendors lay off employees. Contractors who previously considered his company too small to work with have stopped in, asking for work referrals.
“We’re keeping low inventory to keep the cash up, to deal with whatever is to come,” Sivan said. “We’re definitely in a crunch.”
The concerns are hitting people who thought they should be relatively insulated from economic cycles. When Les Boeder retired in 2005, he and wife Syl thought they could live off her income from Advocate Good Shepherd Hospital in Barrington and the investment portfolio they had built.
Not anymore. Smarting from the stock market’s recent losses, Boeder was happy to return to work on temporary assignment recently when his former employer needed help. And the couple canceled a Caribbean vacation in order to recoup savings after paying for their daughter’s wedding.
Syl Boeder says she feels fortunate that the couple’s sacrifices are limited to discretionary items. “We feel so badly for all these people who are in such terrible straits, losing their homes,” she said. “For us, maybe we’re just deferring a little bit.”
Of course, whenever recession is in the air, people begin talking about how bad it will be: a relatively comfortable “soft landing” or something worse. Economist Shepherdson said that old argument is beside the point. The key question this time will be about its length because an extended housing downturn likely will be a root cause.
“I would estimate that it’s likely to be a long landing, rather than soft or hard,” he said. “I don’t know how deep it’s going to be, but it’s going to last a long, long time.”
– – –
WHAT DEFINES A RECESSION
Official definition: Two consecutive quarters of contraction in gross domestic product.
More complex definition: “A significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production and wholesale-retail sales.”
SOURCES: Tribune research, The National Bureau of Economic Research
———-
IN THE WEB EDITION: Stay on top of economic news at chicagotribune .com/business, where you can also sign up for the daily BizWrap e-mail.