NYT p. 1 -- more good news for retailers who sell commodities -- good thing that consumers are not price sensitive.
nytimes.com
October 12, 1998
Consumer Confidence Is Buckling as Markets Plunge
Related Article
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Summer of Trouble Still Doesn't Furrow Consumers' Brows (Sept. 19)
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By LOUIS UCHITELLE
he global financial crisis and the plunging stock market are beginning to unnerve the nation's more affluent families and make
them more cautious in their spending.
Consumer spending, particularly among families with annual incomes above $50,000, is far and away the biggest source of economic
growth in the United States. Through months of turmoil, this consumption has remained strong, even as other pillars of economic
growth have faded: exports and profits, for example, and spending on the machinery and equipment that allows business to thrive.
Now the first crack has appeared in the will to spend.
The crack is most evident in recent consumer surveys that ask specifically about a household's "financial situation"; that is, its savings,
stock portfolios and real estate holdings -- its wealth -- as well as its income from wages.
Over the last several months, families with lower incomes, and little exposure to the stock market, have showed no change in their
level of optimism. In sharp contrast, households with incomes above $50,000 were optimistic about their financial situation before the
summer's sharp selloff in the stock market, but then in September their optimism fell significantly.
"We are starting to see consumers who feel nervous about the stock market and are becoming more cautious in their spending
behavior," said Richard Curtin, director of the University of Michigan's Consumer Surveys, whose monthly polls are widely followed
by economists as the most reliable indicators of consumer sentiment. "What we have found consistently over the years is that such
changes in sentiment precede significant changes in actual spending by six to nine months."
As such, this would point to a considerable slowdown in the economy sometime next spring.
The consumers in question are people like Ellen Elias, a partner in an upscale Manhattan appliance store, Elgot, a woman in her
forties who says she "owns enough stock to be concerned." She is hoping that stock prices will rebound by the time she needs the
money. Since mid-July, when the selloff began, American stocks have lost $1.5 trillion of their value, Alan Greenspan, chairman of the
Federal Reserve, estimated last week. If this decline continues, Ms. Elias said, she may have second thoughts about some of her
spending.
Doubt has already touched Andrew Kozinn, a 46-year-old men's suit manufacturer and haberdasher, with a store on Manhattan's
Park Avenue. He has a stock portfolio approaching seven figures, he says, but he lives within his annual income from his business, not
his stock market gains. Besides, he said, his stocks are still worth more than they were a year or so ago, before the big run-up in
stock prices that ended in July. Still, Kozinn admits to a glimmer of uneasiness.
"I have just bought a new car, and I am putting a new bathroom in my summer home," he said, "and you start to wonder what you
should have done."
Higher-income families, the people who invested most heavily in stocks and felt wealthier as stock prices rose, account for only 28
percent of the nation's households. The remaining 72 percent, all families earning less than $50,000 a year, invest their savings mainly
in their homes, not the stock market, various studies show, and their feelings about their financial situation have not shown any change
in recent consumer polls.
But they are not the biggest spenders. Higher-income households are. Those with incomes above $50,000 a year account for nearly
half of all consumer spending, the Census Bureau and Labor Department report. Households earning above $70,000, while
representing less than 20 percent of all households, account for nearly 30 percent of all the spending. When signs of economic trouble
appear, their mood swings are much more pronounced than those of the poor.
During good times, more affluent families are notably more optimistic about the economy than lower-income Americans, according to
Thomas Riehl, a partner at Peter Hart Research Associates, a public opinion polling firm. In June 1997, for example, Hart Research
found that only 12 percent of those earning $50,000 to $100,000 a year expected a recession in the next 12 months, while 25
percent of those with incomes under $20,000 saw recession around the corner. The 12 percent shot up to 33 percent in a similar poll
last month, but the outlook among poor families hardly changed. Twenty-seven percent saw recession within a year.
"When a good period for the economy ends," Riehl said, "optimism at the high end comes down closer to what lower-income people
express, even in the best of times."
And high-end spending is the first to be affected. The nation's total consumption is still strong, and many luxury goods -- Volvos and
Mercedes-Benz cars, for example -- are still being snapped up. But hints of weakening at the high end have begun to appear.
Discount stores, catering mainly to the less affluent, reported last week that September sales climbed smartly. But stores like Saks
Fifth Avenue and Neiman Marcus that sell more luxury goods said sales had fallen last month.
Land's End, whose catalogues offer high-priced casual wear, says its sales, after posting strong gains earlier in the year, "have been
relatively flat in recent weeks." The ISI Group and Goldman Sachs & Co., Wall Street firms that track retail sales on their own, both
report a softening. And the U.S. Home Corp., headquartered in Houston, which builds 9,000 homes a year at an average price of
$176,000 apiece, says that while sales are still rising, they are doing so "at a declining rate of increase."
"The traffic count of potential customers through our model homes is down, and we are not converting as many of them to buyers,"
said Robert Strudler, chairman of U.S. Home. "With mortgage rates so low, that is more a reflection of a decline in consumer
confidence than affordability."
Curtin, director of the University of Michigan survey, agrees. The nation's two major consumer confidence surveys, Michigan's and
one conducted by the Conference Board, a business organization, both find that while consumer confidence is still at a high level,
there were significant declines in August and September. Curtin blames the September drop on families with annual incomes above
$50,000.
All year, he notes, more than 60 percent of the households in this category had expressed optimism about their own financial situation.
And then in September, the percentage suddenly fell to 50. That mood change did not show up among households earning less than
$50,000. From January through August, the proportion of optimistic households in this category ranged between 40 percent and 48
percent, and in September the number was a typical 46 percent.
"For the less than $50,000-a-year crowd," Curtin said, "their primary concern is not the stock market, but the impact from falling
exports and layoffs, and that they have not felt yet."
The main issue for this group is jobs, and the demand for workers until now has been quite strong. Layoffs have begun to pick up
lately, but the nation's unemployment rate is still at an unusually low 4.6 percent. |
