(Repeat of item moved on Sunday, Nov. 16)
By Emily Kaiser
WASHINGTON, Nov 17 (Reuters) - The latest U.S. effort to get more money flowing to consumers assumes that there are plenty of credit-worthy households eager to borrow and spend.
That may not be the case.
Rising unemployment and foreclosures are driving more people out of the "prime" credit category, in which banks are still fairly willing to lend. At the same time, consumer confidence has fallen so far that even wealthier people with little trouble getting credit are cutting their spending.
U.S. Treasury Secretary Henry Paulson announced last week that he was redirecting a $700 billion rescue package to focus on consumer loans in an effort to spur lending and get the economy going again.
It was the third incarnation of a program launched last month that was initially touted as a way for the government to buy bad assets from banks and unclog credit channels. Instead, it has been used primarily to buy stakes in banks in the hope that the capital cushion would encourage lending.
So far, there is little sign that banks are loosening their grip on cash, much to the frustration of the U.S. government and countries around the world that rely on a healthy U.S. consumer to drive economic growth.
That will no doubt be a major topic this week as investors brace for another round of grim economic data from many advanced economies and leaders in Washington consider whether even more spending is needed to stave off a deep recession.
Charles Dallara, managing director of the bank lobby group Institute of International Finance, said that just because banks have billions of taxpayer dollars in hand, it was unrealistic to expect normal lending to resume immediately.
"Capital does not automatically create credit-worthy borrowers," he said. "In an environment where banks are already recovering from serious losses on earlier lending, it's not only natural -- it's inevitable that there is a substantial degree of caution built in to lending activities."
WINTER OF DISCONTENT
That caution is largely a reflection of the current economic weakness and concern that it will get much worse.
The number of U.S. workers drawing jobless benefits hit a 25-year high, according to data released last week. Unemployment is likely to climb through next year, perhaps surpassing 8 percent for the first time since 1983.
Between job losses and foreclosures, the number of people who qualify for lower-cost prime rates on credit cards and other loans has been declining. According to consumer credit company Experian, 4.3 percent of U.S. consumers fell out of prime into subprime between September 2007 and 2008.
U.S. retail sales fell a record 2.8 percent in October and were down four straight months, an ominous sign considering consumers account for two-thirds of economic activity.
"Whether this recession turns out to be the worst in 30 years or 60 years is a question of little consequence to most Americans at the moment," said Bernard Baumohl, chief global economist at the Economic Outlook Group.
"People are now sufficiently scared about their jobs and future income that they are shutting down all spending and hunkering down. Many simply want to hibernate through the recession winter," he added.
It is a similar story in the rest of the developed world. Figures due on Friday are expected to show a 0.5 percent decline in consumer spending in France and a sharp contraction in manufacturing across the euro zone.
In Japan, where exports have been hit hard by falling demand in the United States and elsewhere, economists expect a report on Monday to show the economy grew by a slim 0.1 percent in the third quarter. A separate report on Thursday is expected to show an 8 percent decline in October exports.
REVIVING CONFIDENCE
To restore U.S. consumer confidence, particularly among higher-income brackets that account for a disproportionately large percentage of spending, it may be a matter of more time rather than more government money.
The latest Reuters/University of Michigan Surveys of Consumers showed that the mood picked up slightly in November, thanks primarily to a steep drop in fuel prices. But a gauge of expectations fell, suggesting that consumers have little hope the economy will improve quickly.
That does not bode well for spending in the holiday season, typically the biggest shopping period of the year.
Luxury shoppers, who can normally be counted on to keep spending even when times get tough, have cut back dramatically. October sales at upscale chain Neiman Marcus dropped 25 percent from a year earlier.
Figuring out when things will get better is a bit of a chicken-and-egg exercise. Falling stock markets have battered consumer confidence, and that in turn has curtailed spending and dragged down stocks.
Burton Tansky, chairman and chief executive of Neiman Marcus, said luxury demand may remain weak for a while.
"Based on our experience in previous business cycles, we believe our customers' buying levels will increase once the economic environment stabilizes," he said. (Editing by Dan Grebler)