Now jobs for teens are less plentiful, and parents who supply the allowances are feeling the economic pinch themselves.
The stalwart retailers of teen apparel, such as Abercrombie and American Eagle Outfitters Inc., are reporting sluggish sales, defying the myth that teen spending is recession-proof: It holds up longer, but can eventually fold.
It's even becoming cool to be frugal.
Last week, Ellegirl.com, the teen offshoot of Elle magazine, launched a new video fixture called Self-Made Girl, which shows teens how to make clothes and accessories. The first video offers tips on how to create a prom clutch.
"It's a little tacky in the economic unrest to tote a big logo bag," said Holly Siegel, the site's senior editor. She said it's no longer about teens "one-upping each other," but rather where they can get it cheap.
Victoria Bradley, a 16-year-old from Springfield, Mo., says the $80 she earns each month from baby-sitting is being eaten up by more expensive school lunches, late-night snacks with friends and stylish clothes.
Now, she says, she and her friends head for the thrift store or just browse at the mall.
"I used to be able to buy a T-shirt and jeans every couple of months," Victoria said, adding some of her friends are even "making their own clothes or altering their old ones to fit or look better."
Victoria's mother, Michelle Bradley, said she and her husband cut back spending on themselves last year, and early this year also started paring back "frivolous" buying for their three girls.
"We have made a conscious effort to not use credit cards," said Bradley, who stopped paying for Victoria's text messages last month. The top priority is school supplies and choir fees.
The job market for teens isn't what it used to be, either: Nathan Reeser, a Cincinnati 15-year-old, lost his job making pizza four months ago and has had to cut back on spending. He's shopping more at Target and less at Abercrombie & Fitch's Hollister stores.
"Now, I just get money from my parents, but they don't have as much because of taxes and everything else," he said.
Teen hiring has slumped by 5 percent since March 2007, with many mom-and-pop stores, which typically hire younger workers, laying off employees. Hiring in the overall job market fell by just 0.1 percent during the same period.
That's still not as bad as the 13 percent drop in teen hiring in the early 1990s. That means that if the larger job market mirrors the last teen hiring slump, "we're not out of the woods," said Michael P. Niemira, chief economist at the International Council of Shopping Centers.
Economists say this teen spending slump could be the worst in 17 years, when teen frugality led to the demise of once-hot Merry-Go-Round Enterprises Inc. and ushered in an era of flannel shirts and torn jeans.
Last month, teen retailers suffered an 8 percent drop in sales at established stores. The good news is that the under-20 crew is still spending on tech gadgets like iPods, cell phones and headsets, analysts say.
What makes this slump different, says Deloitte Research chief economist Carl Steidtmann, is the soaring cost of basics such food and gas, which have a direct impact on younger consumers.
Gas could reach $4 a gallon this summer, and prices for teen favorites like pizza and potato chips have all climbed, squeezing the amount of cash teens can spend elsewhere.
Sales at teen retailers open at least a year averaged a 0.5 percent decline last year, compared to a 3.3 percent increase in 2006 and a 12.1 percent gain in 2005, according to a UBS-International Council of Shopping Centers tally.
Retailers like American Eagle and Tween Brands Inc., which operates Limited Too, have cut their earnings outlooks amid deeper-than-expected sales declines. Abercrombie & Fitch reported a disappointing 10 percent sales drop in March, while Pacific Sunwear of California Inc. announced earlier this year it was shuttering its urban-inspired Demo stores.
Among the few bright spots is Aeropostale Inc., whose jeans are about 30 percent cheaper than Abercrombie & Fitch. Candace Corlett, principal at consulting firm WSL Strategic Retail, said low-price chains like H&M and Steve & Barry's should do well.
And Urban Outfitters Inc., which operates its namesake stores and the Anthropologie brand, has held up well. Trend experts believe that's because it has a thrift-store feel.
Secondhand clothing chains have seen business surge this year as teens and their parents buy popular brands like Gap, Banana Republic and Juicy Couture at a fraction of the regular price.
Kerstin Block, president and co-founder of Buffalo Exchange, a Tucson, Ariz.-based chain that sells second-hand clothing, said Gap jeans there run $9 to $20. A new pair runs $50 to $60. Block noted that buying second-hand is also appealing to a growing eco-friendly sentiment among teenagers.
"It is way cooler to get a super deal on that shirt rather than being able to spend the most money on something," said Anna D'Agrosa, director of Consumer Insights at The Zandl Group, a market research company focusing on teens. "Kids are becoming really aware of what is happening to their economy and to their families."