Consumers May Begin to Feel the Pain
Commentary. Art Pine is a columnist for Bloomberg
News. The opinions expressed are his own.
By Art Pine
Washington, April 16 (Bloomberg) -- One of the most critical uncertainties about
the U.S. economy is how much consumers will pull in their horns. Until now,
they've been keeping the economy afloat. If they suddenly retrench, a recession
may be inevitable.
So far, they've been defying all the odds -- and the forecasts. Stock prices
plunged during the first quarter of this year, and company job-cut announcements
proliferated, yet consumer spending rose, probably at a 3.5 percent annual rate.
``There's a mixed message out there,'' said Edward Sarpolus of EPIC/MRA, a
Michigan polling firm. Even in Rust Belt states, he said, ``the public's not ready to
jump off the 100-story building. They're not ready to say there's a recession.''
Now, two new factors have entered the mix that economists say could well test
that assessment -- and decide how deep the slump is likely to be. First, the
economy has actually begun losing jobs. Second, household wealth has fallen
dramatically.
The change in the job picture could have the most visible impact. While so-called
layoff announcements have been legion in recent months, they haven't hit home to
consumers. Many jobs are eliminated by attrition. Some job cuts never actually
happen.
This time it's different, because the statistics represent genuine job losses. The
economy lost 86,000 jobs in March. The number of workers filing new claims for
jobless benefits has been rising rapidly each week. It's now 49.6 percent above a
year ago.
Consumer Wealth Plunges
That means that the unemployment rate -- now 4.3 percent of the workforce, up
from 4.2 percent a month ago -- is likely to start rising more rapidly, economists
say, heightening anxiety about the economic outlook, and prompting consumers
to hold back.
``This could be deadly, because when you start seeing actual drops in
employment, people get really scared that they could be next,'' said David Wyss,
chief economist for Standard and Poor's in New York. ``This could turn into a real
recession.''
The plunge in net household wealth also is worrisome. For months, economists
have been debating the likely impact of the ``wealth effect.'' If the bull market was
such a major factor in fueling the boom, will the bear market spawn a recession?
Wealth-effect theorists warned that such a ``reverse wealth effect'' would have a
major impact on consumer spending. Plunging stock prices will make everyone
feel poorer, they contend. So many Americans own stock now that the effect
could be enormous.
Until now, however, the evidence has been difficult to find - - in part because real
estate values have continued rising, giving consumers a ready source of capital by
refinancing their home mortgages. Borrowing and credit-card use also shot up.
Last quarter, however, real net consumer wealth dove to a level some 11 percent
below that of a year ago -- the biggest deterioration since the oil-shock recession
of 1973-1975 -- says Ian Morris, chief U.S. economist for HSBC bank in New
York.
Scary Drop
``When household assets decline, consumers cut back on the growth of their
liabilities,'' Morris said. ``Most are mortgages, which is then likely to hurt housing
-- the last pillar of strength'' in the economy. ``It's a pretty scary drop.''
To be sure, there's still enough uncertainty for the pessimists to end up mistaken.
If the economy picks up soon -- as Federal Reserve officials currently are
predicting -- the mood among consumers could brighten quickly.
Fears about the ``reverse wealth effect'' also may prove overdone, says James A.
Bianco, head of Bianco Research LLP in Barrington, Ill. He has a different view:
The reverse wealth effect is real, but it's run its course. The danger is over.
No Further Market Slides
As Bianco figures it, while the stock-market slide of the past year has been
horrific, the bulk of it has been in stocks of computer-related and
telecommunications companies. Some 277 of the Standard and Poor's 500
stocks are higher than a year ago.
Bianco concedes that since the computer-related stocks caused the wealth effect
in the first place, the movement of the Nasdaq Composite Index over the past 13
months should have almost as big an impact on the way down.
He's betting, however, that because Nasdaq stocks already have fallen so far, the
danger has passed. The market slide hasn't prompted consumers to cut back so
far, and isn't apt to from now on because it's unlikely to go any further.
Stock prices of companies in other, more traditional industries are holding their
own, he says, and Nasdaq investors aren't likely to sell a once-high-priced stock
that currently is worth only $10 because, they figure, it can only go up.
``The whole (Nasdaq) sector has become a giant lottery ticket,'' he said.
Neither the job picture nor the wealth-effect issue is simple, of course. If the
economy stabilizes, employers may decide to hang on to their workers a little
longer, on grounds that the labor market still is tight and help is hard to find.
Consumer sentiment fell during February, only to rebound in March without
affecting consumer spending. Last Thursday, the University of Michigan's index of
consumer sentiment showed that Americans are becoming more pessimistic
about the coming months.
``This is where the rubber meets the road'' in determining where the economy
goes from now on, said S&P's Wyss. ``Until now, there have been signs of a
slowdown, not a recession. Now, it's begun really hitting people.''
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