The Latte Era Grinds Down

He should have no trouble finding one. The median size of newly completed single-family homes, which had been rising steadily, fell from a record 2,302 square feet in the first quarter of this year to 2,241 in the second quarter, according to the Census Bureau. Bernard Markstein, a senior economist at the National Association of Home Builders, says builders are "putting in fewer amenities, [and] a lower grade of cabinet and counter." Meanwhile, many owners of existing homes have stopped remodeling. In the pricy Santa Fe, N.M., area, smaller-scale renovation jobs have dried up. "The $20,000 to $30,000 kitchen job and the $12,000 to $15,000 bathroom are harder to come by than last year," says Douglas Maahs, president of Honey Do Home Repair and chair of the Santa Fe Remodelers Association.

The phenomenon is even having an impact on what people eat. Waiting outside a Beverly Hills Ruth's Chris Steak House, Tom Brant, a retired CPA who lives in Covina, Calif., said the bill for dinner to celebrate his daughter's 35th birthday hurt: $400 for four people. His real-estate and stock-market investments "aren't doing so well lately," says Brant, 69. "I like to eat out and I like steak. But?do I come a couple of times a month? Not?lately, or any time soon." McCormick & Schmick's Seafood Restaurants, Inc., a high-end chain that has expanded rapidly from business districts in major cities to places like Dayton, Ohio, hit a wall this summer after 16 straight quarters of comparable-restaurant sales growth. In late September, it reported that traffic at its 72 U.S. restaurants was weak, "which we attribute primarily to less demand from our aspirational guest," as Doug Schmick, chairman and chief executive officer, put it in a news release. Meanwhile, McDonald's and Burger King are reporting supersized sales growth.

Apparel shoppers are similarly sheathing their debit cards. An online survey conducted this spring by WSL Strategic Retail found that 70 percent of respondents were cutting back on spending for accessories like watches, jewelry and bags. And when big retailers posted same-store sales for September, many reported disappointing results: down 4.6 percent at JCPenney, up only 1.2 percent at Target. Consumers are still willing to trade up. "But if someone wants the designer jeans, they'll cut back on something else," says Mary Brett Whitfield, an analyst at TNS Retail Forward in Columbus, Ohio.

The impulse to spend less and save more has always been cyclical. In the aftermath of a debt binge, Americans always rediscover the joys and benefits of frugality—only to whip out the credit cards once interest rates fall. Michael Silverstein points to powerful, long-term trends that suggest customers will continue to reach for luxury. Real income is still growing, and "trading up has been driven over the long term by women going to work and earning wages that are closer to parity with men."

Of course, luxuries and necessities are in the eyes of the beholder. Janie Pryor, a Los Angeles-based jewelry designer, has had to pare back on discretionary spending. Her company's sales have been off for the last year. But thus far she's been resisting cutting back on one luxury: skin treatments, including her beloved Botox. (Pryor, a 48-year-old former sun worshiper, says the injections take "at least 12 years off" her face.) "I'm not there yet," she says of going Botox-less. "But I'm?starting to accept the fact that that's what I might have to do if this keeps going on." Oh, the perils of a sagging economy.

With Temma Ehrenfeld in New York, Jennifer Ordo�ez in Los Angeles, Gretel C. Kovach in Dallas and Jill Jordan Sieder in AtlantaWith in New York in Los Angeles, in Dallas and in Atlanta

© 2007