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Americans are making progress in working down their heavy debt burden, but they are struggling to break out of another funk holding back the economy: their deep pessimism.
Some economists point to a big drop in household debt as a sign that American consumers -- once considered the driving force of the world economy -- are primed to return to more spendthrift ways.
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But standing in the way of a stronger recovery, and possibly President Barack Obama's re-election as well, are unprecedented levels of concern that better days may not lie ahead.
Research suggests that economic growth will suffer from a sinking feeling among consumers that their incomes will continue to lose ground to inflation. Even though households are digging themselves out of debt, the painful 2007-2009 recession could leave a lasting scar on their willingness to spend.
"Given people's expectations, the outlook going forward does not suggest much upside for consumption," said Jeff Greenberg, an economist at Nomura in New York. "A lot of people will be radically different consumers."
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Polls show record levels of pessimism about future income despite slow improvements in the economy. Indeed, Gallup surveys have found Americans are even gloomier about their finances now than they were during the recession's darkest days.
Americans should be feeling better. They have made big strides whittling down the mountain of debt left after the explosion of the housing bubble and the subsequent recession.
Debt payments have already fallen to the smallest fraction of income since 1994. Households spent 11.09 percent of after-tax income servicing their debt in the third quarter. In 2007, that rate hit a record high 14 percent.
Many borrowers have been helped by the Federal Reserve's push to lower interest rates. Others are simply walking away from mortgages.
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Shaking the painful debt hangover is widely seen as crucial for getting the economy growing faster again. But it might not be enough.
Derek Thompson, a salesman at a credit card company in Fort Lauderdale, Florida, recently refinanced his mortgage to lower his monthly payments. But given a sobering outlook for future income, he says he will use the extra money to pay off other debts rather than buy new stuff.
Thompson needs to start paying off the $50,000 he borrowed to get a bachelor's degree in criminal justice, and he plans to switch careers to get into law. At the same time, he fears he will take a pay cut due to a tough job market.
"I want to wait until the financial situation straightens out a bit before I make any other changes," he said.
