Consumers' wallets are wearing out
By BRIAN MILNER
Monday, November 11, 2002 – Print Edition, Page B2
globeandmail.com
When the U.S. Federal Reserve Board opted last week to slash interest rates to a mere 1.25 per cent, plenty of analysts speculated that Alan Greenspan and his fellow policy setters were worrying about the state of the markets, sickly corporate profits, weak capital spending, uncertainty about Iraq or the dangers of deflation.
All of these concerns are legitimate and likely played their part in spurring the Fed to make what has to be viewed as a surprising move, given its own insistence that all the planks are in place for a sturdy recovery. Based on a translation of its usual fedspeak, the central bank indicated that, once the United States gets through "this current soft spot" and leaves the Iraqi war jitters behind, the economy should have relatively smooth sailing.
It wouldn't be the first time the Fed has been talking through its hat.
The fact is that there are still some dark clouds on the horizon, not the least of which is that the economy's most important player appears to be running out of steam. That would be the redoubtable U.S. consumer, whose courageous spending through thick and thin and well beyond his or her means rescued the economy from the jaws of recession.
The hope of Mr. Greenspan was that the free-spending consumer could hang on long enough for the stock markets to regain their footing and for businesses to resume spending in a big way. But that no longer appears likely.
As corporations continue to cut costs and pour any free capital into debt reduction, signs of consumer fatigue are cropping up everywhere. This has led to gloomy forecasts for autos and housing, the key economic drivers of the past year, and for the crucial Christmas selling season.
Merrill Lynch analyst Daniel Barry fears this could shape up to be the worst holiday period for major U.S. retailers in more than a decade, for a variety of reasons. These include plunging consumer confidence, slowing growth in real wages and rising joblessness, as corporations continue to hack away at their payrolls.
Wage growth "has begun a somewhat precipitous decline over the past seven months," Mr. Barry told clients recently. As the increase in income slows, "its ability to prop up consumer spending will erode."
He might also have added soaring debt levels to his list. The Fed reported last week that U.S. consumer borrowing shot up nearly $10-billion (U.S.) in September, compared with a rise of $5.6-billion in August. That brought the total to $1.73-trillion.
This doesn't include mortgage debt, which has climbed almost 70 per cent in the past seven years to nearly $5.7-trillion.
U.S. household indebtedness amounted to 14.4 per cent of disposable income before this year's surge, a level not seen in more than 20 years.
Meanwhile, the Fed cut is unlikely to have any impact on U.S. credit card interest charges, which currently average close to 15 per cent. Default levels currently run at about 6 per cent, and Americans are seeking the shelter of bankruptcy in record numbers.
"We think there's legitimate cause for concern about whether consumers have the wherewithal to carry the load for the economy through these uncertain times," John Hawke, the U.S. comptroller of the currency, told a bankers' gathering last week in San Francisco.
"It may be . . . that the consumer has already given about all that the consumer has to give. Indeed, debt load statistics suggest that consumers may have given too much, and that retail customers could be especially vulnerable to an unexpected economic jolt."
Yet, the U.S. consumer has long surprised the experts with resilience and remarkable appetite for shopping and debt. That appears to have happened again last month. The Wall Street Journal reports that retail sales climbed a much-better-than-expected 3.1 per cent in October, based on a survey of 81 chains conducted by Bank of Tokyo-Mitsubishi. We'll get the official data from Washington on Thursday.
But logic dictates that there has to be a limit to how long the saviour of the U.S. economy can play the role of Atlas, straining every muscle and maxing out every credit card to keep the economy aloft.
Put simply, the key question facing Mr. Greenspan and every other economy watcher is this: How much longer will people continue to spend money they haven't got on stuff they don't need? |
