IT'S BEGINNING TO LOOK A LOT LIKE DOUBLE-DIP
'Tis the season to be jolly--unless you're a retailer. In that case, you might be scared stiff, worrying whether consumers are going to be in a spending mood as Christmas shopping shifts into high gear. Based on many of the early indications for November, store owners have good reason to fret.
New filings for unemployment benefits are rising, and consumer confidence has fallen to recession levels (chart). Because household spending this year has risen twice as fast as incomes, consumers began the fourth quarter with the lowest savings--and the highest debt--at any comparable period in past recoveries. Worse still, the tax bite on consumers has risen to a postwar record.
Some of the lowest interest rates in more than a decade should be a boon to consumer finances, but many key borrowing rates for households have not come down as much as the Federal Reserve's easing of monetary policy would imply. Aside from falling mortgage rates, which are helping housing, lower rates have not been much of a tonic for demand.
In fact, the sharp drop in interest rates may be hurting consumers more than helping. Households earn six times as much interest as they pay, and interest income is in its steepest annual slide in the postwar era. Older people, who save more, are being hit especially hard.
Add to all this the perception that Washington is long on rhetoric and short on solutions, and it is no wonder that consumers have lost all faith in the recovery. The Conference Board's index of consumer confidence is in a free-fall. In November, it tumbled 9 points, to 50.6, after plunging 13 points in October. Confidence is now below the low point during the Persian Gulf war. In fact, confidence now stands at an 11-year low, surpassing even the worst reading of the 1981-82 recession.
Consumers expressed increasing concern in November about both their present situations and their expectations for the next six months. Also, the gloom spread across all regions, age groups, and income levels. According to the Conference Board, the pattern during the past two months is "the classical profile of recession."
Consumers also scaled back their buying plans in November, a survey result that was supported by the latest drop in car sales. Domestically made cars sold at an annual rate of 5.9 million in mid-November, after slumping to a 5.7 million pace early in the month, which was down from 6 million for all of October. That suggests more cuts in auto production this winter, which would further depress overall industrial output.
The main reason consumers are so downbeat is the drab employment picture. The board reports that pessimists are outnumbering optimists on the job outlook by an increasingly wide margin. In November, 47.9% of those surveyed said that jobs were "hard to get." That was a big rise from 43.5% in October.
Consumers' job worries are rooted in reality. Excluding the growth in health care jobs, employment has barely risen since April. And now, jobless claims are climbing again, after falling in the spring and summer.
The speed of the rise is ominous. Claims jumped by 39,000 in the week ended Nov. 9, to an annual rate of 493,000, after climbing by 33,000 in the week before. Filings are the highest in seven months (chart).
Since claims are volatile from week to week--and usually fall during holiday weeks--the four-week moving average is a better indicator. It stood at 444,000 on Nov. 9. In the past, an average of near 500,000 has been a clear sign of recession. The jump so far, however, has been large enough to suggest that payroll employment in November is likely to post a drop when the Labor Dept. reports the month's job numbers on Dec. 6.
If so, the Fed may have to consider easing policy yet again, especially since the economy looks increasingly as if it is sliding back into recession. The Fed has cut the federal funds rate 13 times since mid-1990, and a further chop before yearend cannot be ruled out. Another cut in the discount rate may come this winter as well.
On top of worries about jobs and incomes, consumers are also saddled with higher taxes. So far in 1991, taxes--federal, state, local, and social security--have risen to a record 20% of personal income. And that excludes property and sales taxes. The tax bite declined in all previous recessions, but this time it has risen.
The same pattern is true for the economy as a whole. During the first three quarters of the year, all revenues received by federal, state, and local governments--excluding federal grants to states--rose to a record 32.7% of gross national product (chart), up from 32.5% in 1990 and 32.4% in 1989. Each rise of 0.1% increases the economy's tax burden by some $6 billion.
During the 1981-82 recession, the tax bite shrank by nearly a full percentage point. Ironically, the huge budget deficit that arose from that tax cut is now paralyzing any effort to stimulate the economy through fiscal policy. The deficit as a percentage of GNP in 1992 is destined to balloon back toward the record 6.3% hit in 1983.
Despite their burdens and their sour mood, consumers are showing some renewed interest in home-buying. Sales of existing houses increased 1% in October, to an annual rate of 3.15 million. Even though sales in the economically depressed Northeast continued to fall for the third month in a row, resales in the Midwest, South, and West all increased in October.
The gain in existing-home sales suggests that lower interest rates are finally having an effect. It actually may have been the small rise in rates at the end of October, however, that pushed people into buying houses during the month, rather than waiting.
The average rate on a 30-year fixed mortgage hit 8.89% in mid-October and then bounced back to 9% by the end of the month--the result of tax-cut talk in Washington that pushed up all long-term rates. Faced with uncertainty about the future direction of rates, consumers in October may have decided to take advantage of the lowest mortgage rates in 14 years.
By mid-November, however, rates had resumed falling, to 8.74% by the week of Nov. 22 (chart). While lower rates have made home-buying more affordable, the steep November fall in confidence suggests that fewer consumers may have entered the housing market.
Builders are feeling the effects of consumer caution, and their pessimism may signal that the housing industry is not out of the woods yet. A National Association of Home Builders survey suggests that sales of new single-family houses were lackluster in both October and November. And 39% of NAHB members say prospects are "poor" for new-home sales over the next six months. That's a big jump from the 30% in October.
The NAHB report also said that buyer traffic slowed in November. Even so, the steady upturn in contracts for new housing suggests that some builders are going ahead with projects.
New contracts for all construction rose 9.2% in October, to an annual rate of $247.4 billion, according to the F. W. Dodge Div. of McGraw-Hill Inc. Residential contracts increased 3.1%--the seventh gain in nine months. Housing contracts are 16.5% higher than a year ago.
Demand for nonresidential buildings jumped almost 20%, but that followed a 20.4% fall in September. In general, the outlook for nonresidential construction remains poor.
That leaves housing to provide the jobs and economic growth needed to lift the overall construction sector. In addition, increased home-buying raises spending on such related goods as appliances, textiles, and furniture.
Boosting housing demand, however, depends on consumers feeling confident enough about the future to shoulder the burden of a mortgage. But judging by the Conference Board's latest report, it will take more than lower interest rates to pull consumers out of their holiday funk--and back into a spending mood.JAMES C. COOPER AND KATHLEEN MADIGAN