Consumer Debt Could Slow 1996 Economic Engine
Momentum may stall by November elections
IT was a solid year for the American economy. The stock market broke all-time records. Business thrived. Many exports climbed at a double-digit clip. But now everyone's asking: What next?
Top analysts, crystal-balling the year ahead, predict slower growth - with the glum prospect that a recession could begin right around election day in November.
Two sectors will be tugging the economy down in 1996, economists say.
First are American consumers, who have run up big credit-card debts and are feeling tapped out.
Second are American businesses, which are expected to put less into new equipment and other ventures after a 1995 spending burst.
Kathleen Stephansen, a Wall Street economist, says industries are burdened with too much inventory - a factor that has prompted the Fed to cut interest rates twice this year. Ms. Stephansen expects the Fed to push rates even lower in 1996.
Cynthia Latta, a senior financial economist with DRI/McGraw Hill, says: "The No. 1 contribution to the slowdown is consumer-debt loads, which are at historic highs."
US retailers felt the effects of all that debt during the Christmas season. Buyers' appetites for goods fell dramatically short of retailers' hopes. Many stores that usually rack up half their annual sales during December are now desperate to unload well-stocked shelves at bargain prices.
Continued lackluster sales are expected to put a damper on new investment. During the past 12 months, companies have largely spent their money on equipment that allows technological advancement, says Sedona, Ariz.-based Robert Eggert. His firm, Blue Chip Economic Indicators, conducts eagerly awaited monthly surveys of some 50 prominent economists across the country.
"Our consensus assessment of 1995 was that capital investment was strongly fueled by our global competitiveness, improved productivity, and several years of good corporate profits" that were finally poured into new investment, Mr. Eggert says.
Some 12 percent of the Blue Chip economists "believe recession will begin by the end of '96, and 31 percent expect it by the end of '97, but just over half do not think it will happen until 1998 or later," he reports.
The consensus prediction for 1996: a "leveling off of the economy with inflation under control."
Eggert, however, says his own personal forecast is "pessimistic." He is particularly troubled by "how deeply consumers have gone into credit-card debt."
Eggert looks for no more than 2.1 percent growth next year, significantly less than the Blue Chip's projected 2.6 percent.
"I weigh in a sluggish auto industry, a housing market that will exceed demand, and a slower time for other durables," he says.
The country's demographic shifts will play a prominent role in the pullback from consumption, he says. "There are an increasing number of baby boomers with children who are coming of age." College-education costs are soaring, he says, and eat into families' disposable incomes that might otherwise be spent on dishwashers and cars.
Stephansen, who is a senior economist with New York-based Donaldson, Lufkin & Jenrette, says by tweaking monetary policy, the Federal Reserve can do much to mitigate the impact of a slowdown.
Indeed, the central bank already embarked on that course, by initiating two interest-rate drops in the past six months, one in July and the second earlier this month. Stephansen is joined by other Fed watchers who have determined that inflation will remain so low in the months to come, the central bank will have no hesitation in cutting rates.
Even so, "Fed action won't allow the economy to bounce back fast enough," Stephansen says. The housing market, whose strength has traditionally served as a barometer of the nation's economic health, has already reached its peak, she says. Wary consumers "will depress demand for houses, cars, and other durables. So we'll see a smaller boost from lower interest rates."
Ms. Latta agrees. "We're headed for a pretty rocky start to 1996. Consumers are tapped out, pay increases are very small and barely keeping up with inflation, and we're not getting the big job gains needed to spur growth."
Private investment, from purchases of cars and computers to the construction of new chemical plants, constituted some 15 percent of the nation's gross domestic product growth (GDP) in 1995.
That percentage is expected to drop to just 6 percent next year, Latta says.
The 'R' word
Could all of this lead to recession?
Stephansen sees those "tendencies developing by the end of 1996. We expect a deceleration of GDP growth to 1.3 in 1996, with the fourth quarter sinking below 1 percent."
Latta is more measured. "The risk of recession at the end of next year is greater than the chance of an economic boom." Yet American exports to Asia, Europe, and Latin America will "offset weak domestic consumption and keep us out of recession," she predicts.
But all this is not likely to put a major damper on 1995's hallmark, the bullish financial markets, Stephansen says. "The expected aggressive Fed action will likely avert any massive correction in the stock market."