A couple of articles on consumer spending, or the lack thereof... I'm currently rather firmly in the camp that thinks that consumer spending will not pick up any time soon, and therefore, the market bottom possibly hasn't yet been encountered, but what do I know...
interactive.wsj.com
June 11, 2001
The Outlook
It's clear now that business gorged on investment spending in the late
1990s, and the economy is now paying the price. Less noticed is that
consumers went on a big-ticket spending spree of their own, and the
consequences could be about to hit.
In the late 1990s, consumer spending surged on houses, cars and all sorts
of hard goods ranging from digital video-disc players and cellphones to
personal computers. Jim Paulsen, chief investment officer at Wells Capital
Management, calculates that by last year, consumer spending on durable
goods and housing, adjusted for inflation, had reached a postwar high of
19% of total household spending, compared with 16% in 1990.
The results were impressive. By
decade's end, the proportion of
households owning their own home
had topped 67% after fluctuating
around 64% from 1984 to 1994.
The number of vehicles on the
road grew almost 2% a year as the
number of licensed drivers grew
just 1.3% a year.
Mr. Paulsen attributes the spending
spree to several factors, many of
which also underlie the
business-investment boom. First,
the length of the economic
expansion made consumers more
willing to take on debt to buy
big-ticket items. Second, the price
of many of these products declined
relative to services and nondurable
goods. Finally, declining interest rates lowered the burden of financing
expensive items and enabled more and more homeowners to refinance
high-rate mortgages taken out in the 1970s and 1980s. They plowed the
savings back into spending.
Michael Swanson, economist at Wells Fargo & Co., also notes many of
the markets for pricey new gadgets were brand new. In the last decade,
the number of households with a personal computer soared to 58% from
22%, according to the Consumer Electronics Association, while the
proportion of Americans with cellphone service soared to 39% from 2%.
"You were catching a lot of new users in those categories," says Mr.
Swanson. He calculates that inflation-adjusted spending on recreation,
which includes most electronic gadgets, grew almost 7% a year from 1987
to 1999, compared with 3% for overall consumption.
This suggests that with unemployment rising, a consumer-spending bust
could be brewing that hits the economy just as hard as the
business-spending bust now under way. To be sure, there are reasons it
may not. Auto and house sales have held up far better than most analysts
had expected. The new census shows more people in the U.S. than
originally thought, and thus a higher sustainable level of big-ticket spending
is likely. Furthermore, consumers, unlike businesses, are about to get a
hefty tax cut.
But signs are appearing that the consumer-investment boom has begun to
unravel. Parsimonious consumers are already clobbering the PC industry --
even more than budget-wary businesses. Roger Kay, analyst at IDC, an
industry research group, says consumers made up more than half the U.S.
PC market in early 2000. Since then, consumers' unit PC sales have
plunged 26% to around 40%, while corporate sales have actually risen
6%. That's partly because of the worsening economy, but also because
most households that want and can afford a PC now have one, says Mr.
Kay.
While auto sales have held up better than expected, that's partly thanks to
deep discounting, which could be borrowing sales from later this year.
Furthermore, even at their current buoyant levels, auto sales are still down
2% from first-quarter levels. The housing market owes much of its
buoyancy to the decline in mortgage rates that began a year ago, long
before the Federal Reserve began cutting rates. William Dudley, head of
U.S. economic research at Goldman Sachs, says that's why housing
activity has not shown the steep declines that typically precede recessions.
But for the same reason, housing is unlikely to lead the economy out of its
slump as it often does. "It blunts the power of monetary policy," says Mr.
Dudley. Furthermore, since current mortgage rates are only a bit below the
average rate on mortgages outstanding of 7.4%, there is little additional
kick to consumption to come from further refinancing, he argues.
Of course, Americans are wealthier than they were a decade ago, and
prices of many durable goods, especially tech goods, continue to fall,
factors that might entice consumers into buying more. But Mr. Paulsen says
it's not affordability that makes him bearish on consumer investment; it's
need. "Take the corporate sector. It's pretty much teched-up. It's not so
much they can't afford it. It's more they don't need it." The same for
consumers: "Everyone is durabled up."
-- Greg Ip
Write to Greg Ip at greg.ip@wsj.com
KJC |
