by Rick Newman

Consumer Spending Habits have dramatically changed during the economic slump

How to stay afloat -- and get ahead -- when the old rules no longer apply

Scott Cohen spent 28 profitable years in the mortgage business, eventually starting his own firm just as the Southern California housing bubble was beginning to inflate in 2001.

By 2007, the small company employed 15 people and provided enough income for Cohen, his wife, Merced, and their two kids to enjoy an affluent life in a tony Los Angeles suburb. But when the bubble burst, Cohen sold his business at a fire-sale price and watched in panic as the only industry he had ever worked in collapsed. His wife worked at the firm, too, and her job disappeared.

As the family income plummeted, the Cohens traded in their two cars for cheaper ones, cut all the expenses they could, and finally had no choice but to sell their home for a loss and become renters.

Many of Cohen's former colleagues took jobs at banks or retail outlets, went into teaching, or just dropped out of sight.

Cohen researched new fields and decided to start a financial-services firm for seniors needing help paying for assisted living. For 18 months, he built contacts at hospitals and nursing homes, took courses, studied regulations, and prospected for clients. Income was scarce. Clients often got cold feet after weeks of meetings. During one low moment, the 50-year-old businessman started looking for a conventional sales job -- and hit nothing but dead ends. Finally, his new firm, Senior Advisory Services, began to produce enough income to stabilize the family's finances.

"For a while, my optimism was challenged," Cohen says. "But I think it was good for us. It shook us up and helped us go in a different direction."

Backing up.

Many Americans feel they're going in a different direction these days -- but too often, it's reverse.

As the Great Recession of 2007-2009 finally winds down, millions of Americans face diminished lifestyles, with no obvious way to regain the wealth and prospects they enjoyed just a few years ago.

Many of the nearly 8 million jobs lost during the recession may be gone for good, with high unemployment likely to persist for several years. Consumer spending may decline permanently, depressing huge economic sectors like housing and retail. Scarce credit and other problems, meanwhile, are stunting the growth of new businesses and inhibiting the "creative" part of "creative destruction." "This is not just a recession," says futurist Edie Weiner, president of consulting firm Weiner, Edrich, Brown. "This is a transformation."

If so, Americans may need to reconsider the unwritten rules that have governed upward mobility since the end of World War II.

From 1945 to 2000, the American middle class was a kind of perpetual prosperity machine that created vast amounts of wealth. There were disruptions, like the recessions of the mid-1970s and early 1980s, but the wealth compounded and progress always resumed its upward trajectory.

Various assumptions formed the pillars of this phenomenal era:

A good education leads to a decent job and a satisfying lifestyle. Working hard means your income will keep going up. Devotion to your career will produce a comfortable retirement. And each generation will be better off than the one that came before.

Now, as Americans are ruefully discovering, a bachelor's or master's degree doesn't even guarantee a job. Hard work might bring a paycheck, but not necessarily job security or a reliable nest egg. Devotion to your company or career won't inoculate you from getting kicked to the curb. More

Americans are working harder just to stay even and asking themselves a troubling question:

If I did all the right things, why does it feel as if I'm falling behind?

The answer may be that "all the right things" no longer are.

As the economy recovers and jobs slowly return, some of the pain will surely diminish. But disturbing trends that were already underway before the recession are likely to continue and perhaps intensify. For about the past decade, for instance, median household income has been stagnant after four decades of nearly uninterrupted growth, and it actually fell during the recession. Many firms can now substitute technology or cheaper overseas labor for U.S. workers. The housing bust, meanwhile, has shrunk the biggest source of wealth for many Americans, limiting their financial freedom and their ability to move where the jobs are.

A Darwinian outlook.

Many other nations face the same problems, and compared with most of them, the United States still has a dynamic economy.

Forced cutbacks over the past few years may even produce a lean, mean economic machine that comes roaring back stronger than expected. But the Americans with the best shot at getting ahead will approach their future the way Scott Cohen did: They'll find new ways to exploit the skills they have, learn more, and rebound from setbacks without becoming paralyzed.

Unfortunately, however, many Americans are unprepared for a Darwinian economy.

A study by consulting firm McKinsey, for instance, found that 71 percent of Americans work in jobs -- both blue-collar and white-collar -- for which there is low demand from employers or an oversupply of labor, or both.

Manufacturing and agriculture, for example, are shrinking faster than the pool of workers, which drives down pay. Other fields like healthcare, government, and various types of services are growing, but many people deliberately choose fields such as these because the jobs can't be done easily overseas. So the quest for job security drives up the applicant pool, lowering incomes for those huddled in the pack. Even some fields that often require advanced degrees -- such as law, teaching, library science, and some medical-technology specialties -- have relatively low income growth, because lots of people choose them and once you have the credentials, the work is fairly standardized.

The real payoff goes to people with an ever expanding set of skills who work in growing and complex fields.

The highest earners are well educated, but they also have strong "tacit" and "cognitive" skills that are difficult to teach in a classroom: informed intuition, judgment under pressure, the ability to solve problems that don't have an obvious solution.

Those tend to come with experience, but top earners also go to the trouble to keep up with the latest technology -- no matter how exhausting -- and use it to solve bedeviling problems. "There's an increasing demand for tasks that require human skills complemented by technology," according to the McKinsey study. "Mastery of cognitive skills -- the mental abilities people use to think, study, and learn -- is an even more important determinant of income growth than levels of education."

Flexibility and quick decision-making help, too.

After getting laid off last June, for instance, Florida software salesman Phil Landry ran the numbers and figured that if he couldn't get another job quickly, he had about six months until he'd have trouble paying his mortgage. He and his wife decided that the five-bedroom home where their three kids had grown up had to go. "We lived in this house for 16 years," he says. "It was our home, but now it's just a piece of collateral I have to sell." Moving to a smaller townhome made life "simpler and more focused" and bought the 55-year-old Landry time to recalibrate his career. "I have to think about how to make myself valuable," he says. "Educate myself. Increase my knowledge." He recently took a position with a technology start-up that pays commission only, and he's prepared to take a second -- or third -- job if necessary.

Sudden unemployment, forced downsizing, or an unplanned career restart may seem like forms of failure. But some resourceful Americans are already turning such adversity to their advantage.

After 37-year-old Catherine Goerz got laid off from her job as a video producer for a San Francisco communications company in 2008, she decided to cut her spending as drastically as possible and start a project that had long been on her to-do list: filming a documentary. She decided to explore creative ways people were toughing out the recession, and the film won a small grant that helped her fund a longer version, called RE: Invention, which she hopes might open the door to a paying career in film. And if it doesn't, she plans to return to the corporate world with more freedom to do what she wants. "My quality of life has improved," she says of living on a reduced budget. "I'm not tied down by location, and I don't have to be under somebody's gaze eight hours a day."

Working parents or others with major financial obligations may dread forced dislocation, but sporadic, unpredictable careers could end up being the norm, predicts Weiner. She foresees more "inverted, nonlinear" lives in which pay goes up and down instead of rising consistently, and workers move between disciplines and try things they want to do at younger ages instead of waiting for retirement. Consumers would have to spend less, save more, and grow comfortable with uncertainty. Yet these things are already happening, and some workers have adjusted to nonlinear careers. Allan Fawcett, a 53-year-old computer consultant in Burbank, Calif., routinely alternates between high-paying contract work and periods of unemployment -- which he cherishes. "It's the perfect time to travel or pursue a passion or organize the many things left undone during the crazy days of work," he says. To prepare, Fawcett lives frugally, keeps at least six months' worth of living expenses on hand, and carefully plans how he'll spend the time between jobs. He has earned one master's degree during breaks from work, with plans to pursue another. "These gaps always seem too short," he says. Now that's a fresh way of looking at things.

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The Next Hundred Million: America in 2050

Surviving the American Economic Makeover | Rick Newman