Consumer Sentiment Hurt by Stock Fall Rebound May Slow, Economists Say
By John M. Berry / Washington Post Staff Writer Saturday, June 15, 2002
Over the past month, the tumbling U.S. stock market has shed more than $1 trillion in value, damaging both consumer and business confidence and causing economists and government policymakers to become concerned that the economy may grow more slowly in the second half of this year than they have been expecting.
The University of Michigan said yesterday that its preliminary consumer sentiment index for this month fell sharply, to 90.8 from a final May reading of 96.9, far more than many analysts had anticipated. The connection between changes in consumer sentiment and spending is hard to pin down, but many economists believe there is at least a loose one. The link between business confidence and spending may be stronger.
"Equity markets have continued to weaken almost daily since early May, with potentially serious consequences for the real economy," said economist Joseph T. Abate of Lehman Brothers in New York. "The tougher financial climate has damaged corporate sentiment, reducing the willingness of CEOs to undertake new capital projects, construct new buildings or hire additional workers. Rather, their focus has been on improving the companies' balance sheet and boosting cash holdings.
"Similarly, the weaker stock market has reduced household equity wealth by over $1 trillion since mid-May, and raises the odds that consumer confidence could fall sharply in the coming months," Abate said.
But something more than a sour stock market seemed to have affected the University of Michigan's sentiment index, according to analysts there.
"Consumers became much more concerned about the outlook for the national economy" in early June, a university statement said. "Importantly the decline in the sentiment index was much larger among households with incomes below $50,000 than among upper-income households."
That result was unusual because for almost all of the past 2 1/2 years, households with lower incomes have had a more positive opinion about the economy's future than those with higher incomes, perhaps because the latter have been more strongly affected by falling stock prices.
An important feature of many economic forecasts for the second half of the year is a prediction that consumer spending will remain relatively robust until business purchases of new equipment begin to rise again at a healthy pace. So far, however, there are indications that the large drop in such business spending that began a year and a half ago is ending, but little sign that businesses are beginning to increase their spending.
If consumer spending were to weaken, any increase in business investment might be delayed until it was clear the added production capacity was needed, analysts said.
Economists at UBS Warburg in New York told their firm's clients that the Michigan survey results raised questions about how consumer purchases will fare in the next several months.
"The slump in the stock market likely helped to drive consumer sentiment to a four-month low, but the drop seemed more deeply rooted because it was deeper among households with incomes under $50,000," the economists said.
"Consumers apparently anticipate that growth will slow and the unemployment rate will stagnate over the balance of this year. That combination is likely to keep a lid on household spending," the economists said. The plunge in the sentiment index, coming on the heels of a substantial drop in retail sales last month, reported Thursday by the Commerce Department, "is likely to further fuel worries that consumer spending is now faltering."
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U.S. Stock Investors Add Consumer Spending Slowdown to List of Concerns
By Danielle Sessa / Bloomberg 06/14/02
New York, June 16 (Bloomberg) -- U.S. stocks may extend declines this week on concerns consumers have slowed their spending. Consumers have been a ``pocket of strength'' during the slowdown, said Angela Kohler, a manager at Federated Investors, which oversees $180 billion in Pittsburgh. ``It's important that they not give up.''
This week, specialty merchants will give the latest signal on spending. Best Buy Co. and Circuit City, the two largest electronics retailers, are scheduled to report Tuesday that first- quarter earnings rose. Yet investors will be more interested in what the companies say about the future.
U.S. Treasury Secretary Paul O'Neill said the U.S. stock markets will reverse a recent slide soon, reflecting the strength of the country's economic recovery. ``Eventually it will go back up, maybe sooner rather than later,'' O'Neill said yesterday in a briefing with reporters after a meeting of finance ministers from the Group of Seven industrial countries.
He suggested the threat of another terrorist attack in the U.S. may be undermining investor and consumer confidence, a possible reason for the drop in equities. ``One cloud, and it's not just a cloud for the market, is the cloud over how people feel,'' O'Neill said. ``Something like 80 % of the American people are concerned about another terrorist event, and that has a weight and it affects how people feel.''
Consumers, who account for two-thirds of the economy, picked up the slack for slumping business investment in the recession that began in March 2001. They may be running out of steam. Sales at retailers fell three times more than expected in May, the government reported last week, and a gauge of consumer sentiment declined to the lowest level since February.
The Standard & Poor's 500 Index dropped 11 of the last 13 weeks. The U.S. stock benchmark Friday came within 16 points of the 3 1/2 year-low reached in the aftermath of the Sept. 11 terrorist attack.
Mounting Concerns
A car bomb explosion near the U.S. consulate in the Pakistani city of Karachi, killing 11 people, added to a growing list of concerns that have kept investors from buying stocks. Continued violence in the Middle East and renewed scrutiny of corporate governance are undermining confidence, investors say.
``There are a lot of issues out there,'' said Kohler, who manages the $465 million Federated Large Cap Growth Fund. ``The consumer is one more thing on the radar screen.''
The S&P 500 dropped 2 percent last week, bringing its loss for the year to 10 percent. The Dow Jones Industrial Average declined 1.2 percent and is off 4 percent this year. The Nasdaq slid 2 percent, extending its drop for the year to 20 percent.
Signs that consumer spending and confidence are waning suggest the economic rebound that investors expected earlier this year is waning.
``Consumer spending was very strong and not sustainable at a high level,'' said John Waterman, who oversees $17 billion at Rittenhouse Financial Services Inc. <snip>
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COMMENTARY ---- June 14, 2002
By Rich Miller / Businessweek
What's Crippling Capital Spending?
After taking hits from many sides, CEOs have had their confidence shaken, which has curbed outlays for equipment and expansion
A revival of capital spending: It's what practically all forecasters are counting on to carry the economy forward in the second half of the year. Indeed, economists at the White House, the Federal Reserve, and across the country say a pickup in business outlays is needed if growth is to strengthen. Sure, the economy is recovering from last year's recession, but so far most of the oomph is coming from a turn in the inventory cycle.
With free-spending consumers finally showing signs of slowing down and the housing market looking frothy, economists say Corporate America must boost outlays to keep the economy purring in the second half.
Economists had better not hold their breath. The swoon in the stock market, amid nearly daily revelations of corporate accounting scandals, is threatening to turn hopes for a second-half revival of capital spending into a mirage.
"ON THE DEFENSIVE." The market decline is raising the cost of capital to companies, depressing business confidence, and prompting chief executives to concentrate on cost-cutting and accounting rather than equipment expenditures and expansion. "The stock slump is putting corporate management on the defensive," says John Lonski, chief economist at debt-rating agency Moody's Investors Service. The result: The economy could end up expanding far more slowly in the second half than at the 3.5% pace many forecasters expect.
Even before the slide in stocks, expectations for a pronounced increase in capital-goods spending in the second half were looking iffy. Yes, new orders for capital goods -- everything from heavy trucks to PCs -- picked up in April. But actual shipments fell, and order backlogs declined, suggesting companies were canceling old orders faster than they were placing new ones. What's more, a weekly survey of old-line capital-equipment producers by consultants International Strategy & Investment found that their business tailed off sharply at the end of May and into June, to their lowest levels since last November.
Now, there's a real risk that Wall Street's woes could turn what was shaping up as a bad situation into something worse. How so? In part, because the stock slump is affecting business confidence by hitting CEOs where it hurts most: in the pocketbook.
WHY BOOST SPENDING? Stock options now account for 80% of executive compensation. By BusinessWeek's calculations, the average CEO lost an astounding $15.4 million in pay-related wealth last year, thanks to the steep drop in the market in 2001. With share prices also eroding this year, the hit to corporate honchos is only getting worse. "That feeds directly into CEO confidence," says Goldman Sachs chief economist William C. Dudley.
It's not just lower stock prices that are shaking confidence. Business leaders are under attack as never before for playing fast and loose with company books during the go-go years of the late 1990s. So they're hunkering down, rebuilding battered balance sheets and cutting costs in a bid to regain investor trust. With many industries still awash in excess capacity and the economic outlook so uncertain, CEOs see little reason to rush ahead with plans to boost spending and expand capacity.
"Capital spending is constrained," IBM CEO Samuel J. Palmisano told analysts on May 15. "Everyone is driving towards consolidation and savings." And spending on software is no better than hardware. "It certainly is every bit as challenging, if not even somewhat tougher, than it was in Q1," Kenneth A. Goldman, CFO of software maker Siebel Systems, told a Bear Stearns conference on June 11.
RUNNING FROM RISK. So, could the downbeat mood sour the economy in the second half? That prospect clearly worries President Bush's chief economic adviser, Lawrence B. Lindsey. He sees a risk that corporate chieftains and investors will overreact to the excesses of the late '90s and pull back too far. "When the excesses were happening, people might have been more skeptical," Lindsey says. "But now there may be excessive risk aversion."
There may be good reason to expect an eventual pickup in capital spending. Profits and cash flow are reviving, and productivity has stayed strong. But as long as gloomy CEOs remain under a cloud, the risk increases that the revival of spending will occur later, and come in weaker than generally hoped. And that could translate into sputtering growth in the second half. |
