Wall Street Journal

By SARA MURRAY

Middle-class Americans made their deepest spending cuts in more than two decades, slashing spending on such discretionary items as restaurant meals and alcohol during the recession.

Households in the middle fifth of the population sliced their average annual spending to $41,150 in 2009, the Labor Department said Tuesday in its annual spending breakdown. That was down 3.1% from 2007 and 3.5% from 2008, the steepest one-year drop since records began in 1984. The drop came even as those households' after-tax income remained relatively stable over the two years, at an average $45,199.

Meanwhile, the poorest Americans spent more as prices for necessities like food and rental housing climbed. Spending rose 5.6% from 2007 to 2009 for the poorest fifth of consumers, the most of any other income group, despite a 5.5% drop in after-tax income to an average $9,956 a household. In some cases, elderly people and others with low incomes dipped into savings or relied on credit to get by.

"What you're looking at here is people at the bottom trying to hang on," said Timothy Smeeding, public affairs professor and director of the Institute for Research on Poverty at the University of Wisconsin in Madison. "You can't go below a certain level."

Average annual expenditures for people in all income groups dropped 2.8% from 2008 to 2009, the first spending decline on record. The numbers don't account for inflation, which has been significant in some areas such as food and rent. One consistently rising cost for all income groups was health care, where spending rose 9.6% from 2007 to 2009 as the cost of care climbed.

"I've become a lot more cautious," said Doug Pendery, who owns a small Cincinnati-based plastics manufacturer and considers himself somewhere in the middle to upper-middle class. He said he has seen health care and taxes eat up a larger share of his income. "You're really not saving more," Mr. Pendery said. "You'd like to [but] your expenses and everything else continue to go up."

Middle-class households reined in spending mainly on discretionary items. On average, from 2007 to 2009, they cut spending 20.1% on alcoholic beverages, 15.2% on clothing, and 9.5% on restaurants and other food away from home. They also spent less on some groceries, cutting back on items such as fresh milk and cream, as well as seafood.

Some of the change in spending could reflect a shift to cheaper alternatives, such as picking McDonald's over sushi. Still, the relative austerity reflects a broader retrenching among consumers spooked by high unemployment and a sharp drop in the value of their homes and investments.

The lowest earners spent 15.4% more on food last year than in 2007, shelling out more for cereals, meat and processed vegetables. Since many in the lowest income group may already rely on discount shops and make few discretionary purchases, it can be difficult for them to scrimp.

Among the poor, rent expenditures increased 5.3%. Those who managed to stay in homes they owned saw their mortgage payments rise 27.8%, suggesting that policy makers' efforts to reduce mortgage-debt burdens aren't reaching the most needy. Across all income groups, mortgage payments were down 7.6%.

Judy Sheppers, 69 years old, said she was doing her best to get costs down. Laid off as a receptionist at the end of 2008, Ms. Sheppers relies mainly on monthly Social Security of $1,422, which will put her in the lowest income group when her weekly $133 unemployment benefits run out.

Ms. Sheppers said her group of friends in Aiken, S.C., who used to meet for cocktails and dinner every couple weeks, has created a more cost-friendly routine now.

"We've started doing more at-home entertaining, pot-luck-type things," Ms. Sheppers said. "Everyone brings a dish and someone brings a bottle of wine. In a way, that's nice."

Even the richest fifth of consumers responded to the recession by closing their wallets. Their spending fell 2.6% from 2007 to 2009.

"While their incomes are stable, their assets have declined," said Luigi Pistaferri, an economist at Stanford University in Palo Alto, Calif. "They're waiting to buy the boat or the expensive watches," and trying to rebuild wealth instead.

Write to Sara Murray at sara.murray@wsj.com