Street's Fear: Consumer - Spending Slowdown
By REUTERS / July 28, 2001
Wall Street, spooked by news of massive layoffs and slumping retail sales, is fearing consumers will become tightwads and depress the economy even more.
That spells doom for stock market pros, who have so far relied on consumers' open wallets to pump up the economy and corporate profits. After all, consumer spending has been the engine of the decade-long U.S. economic expansion. ``The underlying fear in the market is that we're losing the consumer,'' said Rich Levy, head of block trading at CIBC World Markets Inc. ``His buying had been holding this thing together.''
Stocks have tumbled as investors eye reports from companies such as Lucent Technologies, which announced a stunning 15,000 to 20,000 job cuts, after saying it would slice about 27,000 jobs earlier in the year.
Consumers get nervous when they see friends and neighbors losing jobs and they often reduce their spending, in case the economic malaise strikes their own work place.
In addition, retailers such as online bookseller Amazon.com, have warned of slumping sales past and future. This has heightened fears the consumer has bowed out of spending on everything from pleasure reading to refrigerators.
And what's really jolted Wall Street has been the number of non-technology companies that have warned of troubles ahead.
For example, DuPont, the No. 1 U.S. chemical company, on Wednesday announced a second-quarter loss, said it would cut 1,500 more jobs on top of previous layoffs and said business would likely be even worse in the third quarter as it struggles with weak demand for its chemicals and plastics during the economic downturn.
DuPont's materials are widely used in consumer products, such as carpets, pillows and even cooking ware.
``Two to three weeks ago, the prevailing attitude was that an economic recovery was around the corner,'' said Ned Riley, chief investment strategist for State Street Global Advisors, which oversees $720 billion. ``Now there's a feeling that the flu is catching.''
Stocks have slid as a result. The Standard & Poor's 500 index (.SPX) has dropped 5 percent since early June, when companies started announcing layoffs and slumping profits during the so-called ``confession'' season. That brings its year-to-date loss to about 8.9 percent.
And money managers say they are reluctant to make big bets on stocks until there are clear signs the economy is on the mend and consumers will keep spending.
``The market hasn't discounted a consumer recession,'' said Riley. ``That's why money managers are very guarded in their outlook -- the major variable is still unresolved.''
A DROP IN TEETH WHITENING
Consumer spending underpins three-quarters of the U.S. economy. If Main Street America keeps buying cars, refrigerators and books, the economy can absorb a tremendous amount of pain without succumbing to a recession. But if the consumer pulls back, all bets are off, investors say.
For now, there are signs the consumer is hanging in there. Robust auto sales, for one. U.S. sales of cars and light trucks rose 0.2 percent in June from the same month a year ago. What's more, auto sales in 2001 are on track for their third-best year ever.
And Federal Reserve Chairman Alan Greenspan added his own vote of confidence in an address to the Senate Banking Committee on Tuesday.
``The fabric of consumer confidence has not been breached,'' said Greenspan, who added that falling energy prices were boosting corporate profits and putting more money into individuals' pockets.
But troubling clouds hover on the horizon in the form of economic data, and even anecdotal evidence.
Durable good orders dropped sharply in June, pointing to lingering weakness in the manufacturing sector, more than the 0.8 percent drop economists had expected. In May, orders had risen 2.7 percent.
The effects of the slumping economy and lagging stock market are everywhere. One Manhattan dentist said patients were putting off elective procedures, such as teeth whitening.
``Suddenly they're finding that their portfolios have contracted, and they're much more mindful of the dollars,,'' said Dr. Michael Sinkin. ``They say, 'I put it off this long, I'm going to put it off a little longer.'''
Traders say the fear that consumers are closing their wallets, is now widespread throughout Wall Street. And until there is evidence pointing to rising consumer confidence and continued growth in housing and auto sales, money managers say they will remain on the sidelines.
``It's a horrible market,'' said Rich Levy, head of block trading at CIBC World Markets Inc. ``Weakness is spreading across sectors and people are tired of losing money.'' |
