Gray matters: Penny-pinching seniors hurting the economy?

Most investors know the basic math behind the substantial pullback in consumer spending: High unemployment plus stagnant median incomes means fewer working citizens with enough disposable income for purchases.

Perhaps you're also aware that in addition to cyclical factors, there are structural and technological factors that appear to be changing the shape of the U.S. economy. Historically, consumer spending comprised 60 to 65 percent of U.S. GDP, but it's said we could be entering a "frugal consumer" era in which the percentage is quite a bit lower than that. You may have noticed people at work who routinely went out for lunch but who now regularly brown bag it. That's the kind of structural change, when multiplied by many millions of un-ordered Subway sandwiches and maki rolls, can have a profound effect on GDP.

Still, less visible and less publicized are the cutbacks among senior citizens. Although seniors don't account for the bulk of consumer sales (adults ages 25-54 do), their buying power is still large enough to take another big bite out of U.S. economic activity.

A weekly retiree lunch is nixed

Expense reductions by senior citizen Mary Reed of New Rochelle, N.Y., represent a classic example. Retired for eight years, Reed's investment portfolio typically generated $35,000 in dividend and bond interest income per year, or about 40 percent of her annual income. But that was before the financial crisis and the recession hit. Several companies that Reed owns shares in, including General Electric (GE), have slashed dividends. Also, a real estate investment trust she owns eliminated its quarterly dividend. As a result, Reed's dividend and interest income will likely not exceed $15,000 this year.

With her residence paid for and a pension, Reed says she's "still more fortunate than most, particularly with all the lay-offs occurring," but the investment income reduction has nevertheless forced her to curtail expenses -- and that belt-tightening is not inconsequential for the U.S. economy.

Her first cutback? Reed used to get together for lunch each week with fellow female former coworkers -- "Retirees' Day Out," she called it. A local eatery typically benefited to the tune of $100 to $125 every week. Not anymore.

Other cutbacks: Reed used to have a laundry service wash and dry her clothes, which cost about $100 per month, and would go out for a movie about once a week "because I'm old-school and I like the theater experience." Reed nixed both when her dividends shrank; now she washes her clothes at home and rents the films she wants to see from a DVD rental store.

New car puchase, vacation postponed

Mount Vernon, N.Y. retiree Simon Moran's cutbacks are also illustrative. Moran had planned to buy a new car this year to replace his six-year-old sedan, but a property tax increase and dividend income cuts has put that out of the question, he said. Moran had also planned to take his annual weekly vacation trip to Missouri to see his favorite baseball team, the St. Louis Cardinals, but his 2009 budget won't allow it now. Moran said he typically spent "$2,500 to $3,000 during the trip," including gifts for relatives in Missouri. This year, he says he'll watch the Cardinals when they travel to New York to play the Mets. As for the Missouri trip, there's always next year, he said.

Economic Analysis: Consumer spending cuts by adults in the workforce and by young families are well publicized and critical enough. But what's less discussed -- sort of under-the-radar to typical investors -- are the cutbacks by relatively affluent seniors. These changes in spending habits by those living on fixed incomes are not as GDP-altering, most economists agree: their budgets didn't have much room to trim to start with. Cumulatively, though, such cutbacks can have a significant ripple effect. Multiply one less retiree lunch or movie ticket a week, or one less vacation with gifts for multiple grandchildren, by tens of millions of seniors, and one can get into the negative billions pretty quickly. In that sense, cutbacks by retirees represent a kind of "silent leak" that is letting ever more air out of business revenue and earnings.

Financial Editor Joseph Lazzaro is based in New York.

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