After the boom U.S. consumers invested and dangerous
By Daniel Sternoff
NEW YORK (Reuters) - The roaring 1990's molded Americans into a new citizenry: invested, indebted, and quite possibly hazardous to the nation's economic health.
A decade of unbridled prosperity sent more Americans into the stock market than at any point in history, turning the United States into a nation of shareholders.
Stock prices scraped the clouds. Incomes soared. Unemployment plunged. Consumers, dizzy with newfound paper wealth, borrowed and spent as if there were no tomorrow.
But there was.
A new millennium brought equities hurtling back to earth just as energy costs shot skywards, leaving Americans feeling poorer and staring at record levels of debt in what may well be the twilight of a record economic boom.
With consumer spending driving two-thirds of U.S. economic growth, a binge of belt-tightening may cause a painful hangover after a giddy spending spree that fueled a record expansion.
The sobering conclusion, some economists warn, is that Wall Street's grip on the nation's psyche is now so potent that market mood swings have become a disturbingly volatile force driving real economic activity.
"The stock market is dominated by animal spirits. There are bubbles. There is speculation. We saw that with the raging euphoria of a year ago and the abject pessimism of today," said Mark Zandi, chief economist at Economy.com.
"The economy is now more sensitive to fluctuations in stock prices, and stock prices are to an extent a function of sentiment. That makes changes in the economy much more rapid and uncertain," he said.
THE HIGHER THEY JUMP...
In a corner of the Museum of American Financial History in New York's financial district stands a bulky machine shaped like an upright coffin that was the lifeblood of Wall Street until the digital revolution upended stock trading.
It and other Dow Jones news tickers spat out financial news to around 5,000 corporate offices on six-inch spools of printer paper.
A hastily-torn bond report clipped to the museum's World War Two-era machine is dated 1992 -- a jarring reminder of how rapidly the crude tools of a market of insiders have been swept away.
The brash spirit of a new Wall Street is best captured in a recent commercial by Internet brokerage Datek Online depicting a mob of investors forcing their way into the New York Stock Exchange, showering shards of glass on stunned floor traders.
"The rules are changing," blared the ad.
Today, 88 million Americans own mutual funds, or nearly half of all households, up from less than a third a decade ago.
During that time, the value of shares held by households mushroomed by more than 400 percent, while the value of homes, cars and other "tangible assets" grew by only 50 percent.
Stock wealth ballooned from roughly $4.5 trillion in 1994 to a peak of more than $14 trillion in early 2000.
A year of declines has wiped out more than $2 trillion in paper wealth, but U.S. stock holdings are still worth three times what they were in 1994.
But have Americans mishandled their windfall?
THE HARDER THEY FALL
Feeling secure as their nest eggs fattened, consumers reached for their credit cards. Consumer debt nearly doubled in the 1990's, topping $1.5 trillion by late 2000. Consumption outstripped incomes by about a percentage point a year from 1995 to 2000.
"Americans were framing spending decisions based on the belief that 25-percent-a-year gains were their God-given right," said Stephen Roach, chief economist at Morgan Stanley Dean Witter, who is forecasting a recession in 2001.
"Consumers incorrectly viewed the stock market as a new and permanent source of savings. That to me a is clear sign of a stock bubble infecting a real bubble," he said.
In 1991, Americans saved around 8 percent of their incomes. By late 2000, the U.S. personal savings rate tumbled into negative territory for the first time since the 1930s.
With equities now near two-year troughs, consumers can no longer count on selling stocks to fuel their spending.
A Goldman Sachs report this month estimated that even a modest rebound in savings would have a "vicious" impact on consumer spending, implying a drag of more than 1 to 2 percentage points on an economy that grew at an anemic 1.1 percent annual rate in the fourth quarter of 2000.
Morgan Stanley's Roach said a return to savings rates of only 3.5 percent of incomes would shave 2 percentage points a year off of consumption growth for three years.
"We would have the worst recession we've ever had," Roach said.
FED'S DILEMMA
Coping with consumers prone to excessive spending when stocks veer higher and to undue caution when the market retrenches is a central "new economy" challenge for the Federal Reserve.
Fed Chairman Alan Greenspan testified to Congress this week that stock-fueled consumer spending was a prominent driver of the record boom. Now that markets are tumbling, the process is clearly reversing, he said.
"Whether it in and of itself is enough to actually induce a significant contraction which in retrospect we will call a recession is yet too early to make a judgment on," he said.
The powerful central bank chief has zeroed in on crumbling consumer confidence as a make-or-break determinant of whether the economy tumbles into recession.
And with Americans in a funk over evaporating stock wealth, managing economic growth indirectly burdens the Fed with a task outside its mandate: defending Wall Street.
"The Fed will say they are never going to target the stock market. On other hand, the Fed is doing everything they can to cushion the economy from recession. Well, part of this recession comes from the wealth effect," said Roach.
The Fed slashed interest rates by an unusually aggressive full percentage point in January, including a rare cut between scheduled meetings, in a bid to shore up consumer confidence.
Roach said an unintended consequence of the Fed's sharp rate cuts could be to reinflate the stock market bubble, thus delaying a necessary "purge" of overstretched consumer habits.
And if stock investors are motivated by greed and fear, an implicit Fed defense of stock prices to avert recession could distort risk perceptions, markets, and consumer behavior.
"There is a general perception the Fed will bail us out of any problem. Therefore with each round of aggressive easing, it stands to reason people are taking on more risk," said Zandi.
12:06 03-02-01 |
