During tough economic times consumers usually pull back on their spending, and this market is no exception, as exchange traded funds (ETFs) that track consumerism have pulled back, leaving room only for necessities.

Falling home values, higher gas prices and more expensive food are just a few reasons Americans are cutting back on spending. During the past few weeks, as Washington and Wall Street have been full of woes, the American consumer has almost disappeared, report Louis Uchitelle, Andrew Martin, and Stephanie Rosenbloom for The New York Times.

The government bailout plan so far does not seem to spur spending at all. The third quarter spending reports are going to shrink, no doubt, for the first quarterly decline in two decades. Many economists, who began the third quarter expecting modest growth, now believe the cutbacks are so severe that the overall economy did not expand either, and they warn that a consumer-led recession could be more severe than the relatively mild one earlier this decade.

Everyone just feels poor these days, as uncertainty about the economy weighs on minds.

ETFs that may reflect this trend:

• SPDR S&P Retail (XRT), down 18.6% year-to-date
• iShares Dow Jones Consumer Goods Sector Index Fund (IYK), down 15% year-to-date

One area that could remain solid is consumer staples, reflected in Consumer Staples Select Sector SPDR (XLP). While the fund is still down 6.7% year-to-date, it’s outperforming other retail funds.

Why is that? Well, consider the following:

• Consumer Staples stocks are less likely to suffer in economic slowdown - people need the basics, after all
• Wal-Mart (WMT), at 11% of the fund XLP - has consistently performed well throughout the economic downturn, due to low prices and appeal to shoppers limiting themselves to the necessities.
• Kraft (KFT) is another top holding, at 3.9%, and is stepping up its efforts to appeal to the value-conscious consumer. They’ve teamed up with Campbell Soup to promote grilled cheese sandwiches and soup – an inexpensive but filling option for people with empty wallets.

Tags | Consumer Staples, IYK, Retail & Consumer, XLP, XRT