July 8, 2002
Despite the Woes of Business, Consumers Keeping the Faith
By DANIEL ALTMAN
candals continue to crash through executive suites. The threat of terrorism hangs in the air. Stock markets have tumbled. And through it all, the economy has pushed forward.
A constant trickle of relatively positive economic news has taken a number of analysts by surprise. Consumers have spent at a respectable rate, partly because low interest rates and robust home prices have made many homeowners, at least, feel confident about their own financial cushions. The manufacturing sector has finally begun to bounce back, and could gain more momentum from the slipping value of the dollar, which could make American exports more competitive.
And despite a rise in unemployment and anemic job creation in recent months, the evidence suggests that the economy, after its sharp rise early in the year, is still on track to show moderate growth of roughly 3 percent for the spring and summer quarters.
To many economists, the recovery's stamina depends on whether the falls from grace in corporate America continue long enough to dent consumers' resilience.
"If we knew that this was all over, and that there weren't any more Enrons or WorldComs out there, I wouldn't be worried," said Alan S. Blinder, a former vice chairman of the Federal Reserve who is a professor of economics at Princeton University. "The worry is that these problems deepen and last a very long time, and that really does wear away at consumer confidence, and business confidence as well."
So far, however, consumers have behaved as though little has happened. Retail sales at chain stores rose almost every week in June, according to surveys by Instinet Research and Bank of Tokyo-Mitsubishi/UBS Warburg. And interviews with shoppers this past weekend suggest that corporate skulduggery doesn't enter into their thinking on whether to buy that new car or splurge on a new sofa.
"I think people are spending more than before," said Carrie Sterrett, 24, poking through red and white sale signs at the Crate and Barrel store on Madison Avenue at 59th Street. Ms. Sterrett, who said she had recently moved to New York to become an investment banker after having graduated from Southern Methodist University in Dallas, expressed no concern about the possible economic impact from the travails at Enron, WorldCom, ImClone Systems and the rest. "I am very optimistic about the future," she said. "The companies that are involved in scandals are just a few bad apples."
Wal-Mart Stores, the nation's largest company, reports that its customers have been looking for bargains but have turned out in numbers.
"People are living their lives normally, but they're still shopping for that best price," said Thomas E. Williams, a Wal-Mart spokesman. "Increased traffic accounts for a large amount of our sales gains."
At the Ikea furniture retailer in Elizabeth, N.J., there was no sign of hesitant spenders. Shoppers lined up outside the doors before the opening on the Fourth of July and crowded the aisles through the weekend.
Some, however, did express concern about the extent of the nation's economic recovery. Robert Bucci, 40, a technology consultant from Staten Island who said he had sold shares in once highly valued companies like Yahoo, Cisco Systems and Dell Computer in the late 1990's before technology stocks crashed, speculated that many consumers are simply spending more than they can afford.
"I was lucky enough to get out at the right time, but now a lot of people are maxed out on their credit cards and just have not figured out they should stop spending," said Mr. Bucci, who was shopping with his wife and three sons. "Enron may have been making up profits, but most Americans are pretending that they are not spending on credit."
Consumers' continuing appetite has puzzled economists who witnessed the positive power of the wealth effect — the link between the value of stock market gains and consumer spending — during Wall Street's boom in the late 1990's.
"The link may not be as strong as we thought," said Professor Blinder, the former Fed governor. "On the downswing, there seems to have been much less impact."
There was little concern about a downswing among shoppers at Lenox Square, an upscale mall in Atlanta's Buckhead neighborhood. Emma Alvarez, 53, shopping with her daughter Rebeca, 17, for dress shirts, said the economy had no influence on her buying habits. "When I need something, I go shopping," she said. And if the economy goes down, she said, laughing, "prices will go down and I will have to shop more."
Some consumers may be increasing their spending precisely because the stock market has performed so poorly. Gus Hageman, 55, a switchman for the Burlington Northern Santa Fe Railway in Minneapolis, said he got tired of watching his self-picked stocks decline this past year. So he recently pulled enough money out of the market to buy an $18,000 Honda Gold Wing luxury touring motorcycle. "I just thought maybe I want to spend this money while I've still got it," Mr. Hageman said.
Of course, consumer spending could slow in coming months. Bill Martin, the chief economist at UBS Global Asset Management, said, "Part of the reason why we haven't seen a larger effect on consumer spending is that the effects of the depression in the stock market have yet fully to come through." He said that consumers, finally noting the stunning decline in their portfolio values or fearing more corporate scandals, might cut their spending and increase their savings instead. That could cause a drop in demand for goods and services that would slow economic growth.
Mr. Martin says Washington eased, or at least delayed, the blow. Last year's interest rate cuts by the Federal Reserve mixed with the president's tax cuts and post-Sept. 11 spending to produce a potent economic cocktail. "Low interest rates are a major help in reducing the burden of debt repayments," he said. "There's been a very, very substantial fiscal injection into the economy, and this has helped greatly."
Low interest rates have also bolstered the housing market. The average rate on a conventional 30-year mortgage has dropped for three straight months, and is hovering around 6.5 percent. "It's allowing people who have experienced that income increase in the last three or four years to buy more homes," said John Schleimer, president of Market Perspectives, a real estate analysis and consulting company based in Roseville, Calif. "They're buying more square footage or they're buying better locations."
Indeed, with house prices having risen steadily in many areas even as the stock market has fallen, more people have been motivated to buy either a new home or even a vacation property, Mr. Schleimer said.
"People have come to the realization in the last 12 months that they can make more money by investing in a new home than by investing in the stock market or mutual funds."
Another source of strength in the economy has been the manufacturing sector, which is slowly recovering from a sharp decline that lasted more than a year. Professor Blinder credits the turnaround to rapid, drastic action by companies.
"They trimmed their payrolls. They trimmed their inventories," he said. "They got clobbered, but they reacted quickly."
The staying power of the automobile industry, which lured customers with zero-percent financing last fall, has particularly impressed economists. "The first thought was that they borrowed all these October and November sales from December, January and February," Professor Blinder said. "That turned out not to be true." General Motors and BMW, for instance, reported better sales last month than in June 2001. Toyota Motor had its best first half ever in the United States. And just as sales slowed a bit in recent weeks, Detroit's Big Three all reacted quickly with another round of discount financing promotions.
Manufacturers outside the automobile industry also stand to benefit from the declining value of the dollar against foreign currencies, which tends to make imports more expensive and gives American goods an extra advantage in selling overseas.
A depreciating dollar could eventually raise the risk of inflation in the United States, said Kevin L. Kliesen, an economist at the Federal Reserve Bank of St. Louis. But for now, he expects low energy prices and gains in worker productivity to keep inflation to a minimum.
And consumers may possess more buying power yet to be released. According to Mr. Williams of Wal-Mart, purchases have been most prolific in fabrics, crafts, electronics and food — all items that can be used in the home. If the bunker mentality from Sept. 11 continues to subside, Americans may start spending on other types of goods and services, too.
But Mr. Martin thinks middle- and upper-class shareholders still have not fully responded to the collapse of the stock market bubble. He expects them to be more cautious about spending as they sell shares and absorb real losses in their portfolios.
Professor Blinder is more sanguine about the hangover from last year's downturn. He sees a greater danger from the gradual erosion of confidence in corporate governance.
"One of the traditional strengths of the American capital markets, and especially equity markets, was that they're relatively clean and investors are well-informed," he said. "Those premises have taken a beating recently. I worry more about the future than the lagged effects of the past." |
