How long will US consumers keep buying?
The consumer is continuing to carry the economy.
But, as spring slowly arrives, will Americans flip open their wallets at the same snappy pace?
Some economists say, yes, Americans are confident that the economy will continue to grow, even if it's at a slower pace than last year. All they need to see are those familiar "Now hiring" signs and a little fatter paycheck in their pockets. But others worry that Wall Street's recent fainting spell, and perhaps a tightening of credit standards, could be the catalyst for Americans to pull back somewhat. And there is concern that some Americans will be hit hard in the pocketbook when they get their February heating bills.
"The biggest challenge is where Americans will find a new source of spending power," says Scott Krugman, a spokesman for the National Retail Federation in Washington.
One important clue came Tuesday when the Labor Department, as part of a report on productivity, reported that labor costs rose 6.6 percent in the final quarter of last year. Compensation on a year-over-year basis is up 4.9 percent.
"Wage growth has been pretty good," says Scott Brown, chief economist at Raymond James & Associates in St. Petersburg, Fla. "With the decline in energy prices since last summer, the consumer sector looks solid."
On Friday, economists will get even more up-to-date information when the government issues the February jobs report. Early estimates are for a gain of 120,000 to 130,000 new jobs – a pace that many economists consider to be just about right for the economy at this point. Even more important, weekly income is expected to rise by 0.3 percent, meaning income will be almost 4 percent higher than last February.
The relatively strong labor market is helping to get the economy through problems in the housing market. On Tuesday, New Century in Irvine, Calif., an issuer of subprime mortgages (issued to people with less-than-stellar credit ratings), was struggling to survive as its shares went down sharply.
"There are some worries about the relationship of the housing sector to the consumer," says Mr. Brown. "People have been using their homes as ATMs (through the use of home equity loans), but the wage increases have a much bigger effect."
Consumers are fairly quick to pick up on the relatively good jobs market. "Confidence remains strong," says Lynn Franco, director of research at the Conference Board's Consumer Research Center. "Consumers are very perceptive at picking up deterioration in the economy."
In fact, the recent stock slide on Wall Street hasn't seemed to have dented confidence much.
"Consumers still don't think there is much to worry about the [economic] expansion ending," says Richard Curtin, director of surveys for the Reuters/University of Michigan Surveys of Consumers. "They are concerned about whether it will slow down enough to diminish their job opportunities."
Mr. Curtin says individuals with incomes above $50,000 per year seem more confident than lower-income individuals. And, he says, there are pockets in the industrial Midwest where confidence has dipped, possibly reflecting the tough times in the US auto industry.
One potential cloud on the horizon for consumers could be a broader tightening of credit standards. So far, Federal Reserve surveys of senior bankers indicate a continued willingness to lend. However, on Tuesday, some Wall Street analysts were warning their customers to expect a slowdown in loan activity as market participants assess the landscape in the wake of the subprime shakeout.
If banks begin to tighten credit standards for consumers, this could precipitate a pullback, says Dennis Jacobe, chief economist at the Gallup Organization in Washington. "I think consumers will spend as long as they can keep getting easy credit," he says. "But there is now some talk about a credit crunch."
With the real estate market still weak, Mr. Jacobe says banks are beginning to reassess some of the loans they have made on the basis of rising home equity. "If there are foreclosures on home equity loans, it would send shock waves through the economy," he says.
However, most consumers still have no trouble getting a loan. But last month they did have trouble getting to the mall because of cold and snowy weather. Tuesday, the International Council of Shopping Centers blamed the weather for a 0.4 percent drop in chain-store sales for the week ending March 3. For the year, sales are up only 1.5 percent.
"From mid-January on, a retailer would like to see hot dry weather because it's the time when they bring out the bathing suits and lightweight material," says Bill Kirk, CEO of Weather Trends International, a Bethlehem, Pa. firm that advises companies on weather patterns. "Consumers don't think it's spring yet."
Mr. Kirk says many Americans will get a shock in the next few weeks when they see their February heating bills. "If people spent $150 to stay warm last February, they will be spending $300 this year," he says. "The energy bills will be off the charts."
Consumers, however, don't have to hit the malls to shop, as Justin Schaldone of eFashion Solutions can attest. In November and December his online firm was having trouble selling outerwear. But in the last two months, the company's sales rose 60 percent compared with last year's.
"We keep our fingers crossed for cold weather," says Mr. Schaldone, vice president of marketing for the Secaucus, N.J. company.