Squelching the Urge to Splurge
As consumer spending dips for the first time in two years, economic exuberance tapers off.
For the first nine months of the year, the American consumer kept the US economy afloat. Now, economists are predicting the shopping spree is over - with implications for economies from South Korea to New Zealand.
Instead, it's now likely that consumers will pull back some to wait and see what happens next in the US and the world.
Among the first casualties, economists believe, will be the "splurge" items, such as the new Volkswagen Beetles, designer clothing, fancy jewelry, and expensive vacations. But even consumers who shop at Wal-Mart will become more cautious. That could reduce the level of imports Americans have been buying - from Japanese televisions to Hong Kong dress shirts.
Reduced purchasing of domestic goods could cut further into corporate profits and slow the economy as a whole.
There are already some signs that consumer confidence is starting to wane.
Surveys in August indicated some concern about the future. Since those were done, however, the front-page news has only gotten worse: President Clinton has admitted he misled the nation; the stock market has dropped significantly; and the Rus-sian economy is teetering on the edge of collapse.
"There are these troubling clouds they [consumers] keep seeing," says Richard Curtin, a professor who monitors the consumer pulse at the University of Michigan at Ann Arbor.
Wall Street to blame
In July, it appears some of those clouds started to exert an influence. On Aug. 28, the US Commerce Department reported that consumer spending dipped by 0.2 percent, the first drop in nearly two years. That dip may be the start of a trend.
Last week, the Conference Board, a business research organization, reported that its index of consumer confidence had dropped for the second consecutive month. Conference Board economist Lynn Franco blamed turmoil on Wall Street and the recent bombings of US embassies in Kenya and Tanzania.
The University of Michigan also found consumer confidence falling for the fourth consecutive month. The cumulative decline, says Mr. Curtin, has reversed all the gains recorded since last August.
Despite these recent shifts, both Curtin and Ms. Franco expect consumer spending to remain the strongest part of the US economy. That is because consumers have yet to personally feel threatened by any of the turmoil.
"What they have not seen yet so far is evidence of unemployment increasing," says Curtin. "That's the last element what would make them see the international situation is being translated into their personal outlook."
Economist Stan Shipley of Merrill Lynch & Co. believes the unemployment rate would have to rise to "well above" 5 percent - from its current 4.5 percent - to really get consumers to zip up their pocketbooks.
There are some preliminary signs that the unemployment rate may start to rise: Corporate profits are slumping, some companies are scaling back their hiring plans, and there are new downsizings in the news. On Friday, a Dun & Bradstreet survey of executives found they have lowered their expectations, including their plans for employee hiring.
However, economists also don't expect any change in employment to happen right away. When the government reports the August unemployment rate on Friday, the expectation is for the rate to drop to 4.4 percent.
With such strong employment gains, Mr. Shipley doesn't expect consumer spending to disappear.
Instead of growing at a 6 percent annual rate, as it did in the first half of the year, he expects consumer spending to slow to a more modest 3 percent rate.
The consumer slowdown comes at a critical moment for the economy. Yesterday, the Commerce Department reported sales of new homes dropped 1.6 percent in July. Until now, the housing market has been booming.
This news could take its toll in the months ahead. Some 35 percent of retail sales take place in the fourth quarter. For most retailers it's important to their survival that they have a good holiday season. It's also the time when the automakers introduce their new models and try to empty their lots of this year's cars.
Making those sales could get a lot tougher if consumer confidence continues to fall, says Susan Jacobs, an auto analyst at Jacobs and Associates, based in Rutherford, N.J.
"We are at a point in the cycle where there is not much pent-up demand - most people are in a position to delay buying for several years," she says.
Incentives for auto buyers
To try to entice consumers, she expects the auto companies will continue to offer incentives. For the past two quarters, car buyers have been able to get from $500 to $1,500 off the base price of a car. "By the fourth quarter we'll be swimming in incentives," says Ms. Jacobs.
Retail stores may fare somewhat better. Irwin Cohen, managing director of consumer business at the accounting firm Deloitte & Touche LLP, anticipates this holiday season will be a strong one.
"As long as employment remains strong and things don't get out of hand, we'll have a pretty good holiday season," he says.