In late January, as the economy was collapsing all around us, my husband and I were hosting a raucous birthday party for 28 children at the local bowling alley.

Considering the setting, it was still quite an affair with cake, pizza, and organic fruit and vegetable trays from Whole Foods (WFMI). We paid extra for the disco-bowling option and opened up a few lanes for the parents. Factor in the invitations, tips, and goodie bags and we were in it for almost $800.

Our seven-year-old twins were thrilled, more so because they hadn’t had a party for their sixth birthday and there was pent-up demand. But, among the adults, conversations dwelled on foreclosures in the neighborhood and which companies were laying off employees. Three parents told me I was nuts for inviting so many children to the party.

While consumer confidence about the economy and jobs has ticked upward since those dark January days, it’s still tepid. “As long as earnings continue to weigh heavily on consumers’ minds, spending is likely to remain constrained,” reported Lynn Franco, director of The Conference Board Consumer Research Center.

This belt-tightening is affecting the party business. Amscan Holdings, a party-goods manufacturer that stocks sister company Party City, reported that sales decreased 5.5% between the second quarter of 2009 and 2008 because of the economy.

Party Animals, a San Diego company that sends characters like SpongeBob and Spiderman to children’s parties for $135 an hour, is doing half the business it was doing one year ago.

“Birthday parties are still a priority but families are scaling down, they are booking characters for an hour instead of two,” says an office manager at Party Animals. “We are going to more parties in people’s homes versus rented halls.”

Some parents are forgoing parties altogether.

In Southern California, people are taking Disneyland (DIS) up on its offer of free theme-park admission on your birthday. Bringing family members or a friend along can still be cheaper than throwing a big party.

Then there’s the neighborhood toyshop. Ridgewood, NJ, mom Alicia Simone took her son on a Toys 'R' Us shopping spree for his fifth birthday instead of booking the usual party gym. “It only cost me $100, much less than a party,” she said.