Economists Say It's Half Full. Consumers Say It's Half Empty

Every fall, the nation's business economists gather to glean some insight into the economic climate their companies will be facing the following year. This year, the forecasters came away fairly united in their belief that a recovery began in the second quarter and that 1992 will see a modest and sustained upturn. What will see the economy through? Domestic demand.

But while the economists may have sold each other on that forecast, consumers aren't buying it. The latest data show consumer confidence falling instead of rising, as households continue to worry about their jobs, incomes, and debts. And sales of cars and homes are getting weaker instead of stronger. Since consumer spending is two-thirds of domestic demand, the economists may have put the recovery in a boat without a paddle.

If the forecasters have any doubts, they didn't show them at this year's meeting of the National Association of Business Economists in Los Angeles on Sept. 22-25. Nearly 80% said the recession ended in the second quarter. Almost 90% saw little chance that the economy would slide back into recession. And 100% expected the recovery to be slower than normal.

The median forecast for real gross national product calls for annual growth somewhere from 2.5% to 2.9% in each of the next four quarters (chart). That would be less than half the average pace in the first year of past recoveries. The three biggest factors limiting growth, say the economists, will be restrictive monetary policy, heavy consumer debt, and tight fiscal policy--not only in Washington but also in state and local governments.

The forecasters look for 2.8% growth for all of 1992, measured from fourth quarter to fourth quarter, up from 0.8% for 1991. And they expect inflation, measured by the consumer price index, to be 4%, up slightly from 3.5% this year. That acceleration reflects the absence of this year's drop in energy prices after the gulf war.


Like most consensus forecasts, that sounds nice and neat. But as the old rule says, the consensus is usually wrong. The immediate problem is that, if the recovery started in the spring, someone forgot to tell consumers. If anything, households are more worried about the economy now than they were last spring when the end of the war had buoyed their spirits.

The Conference Board reports that its index of consumer confidence fell to 72.7 in September, from 76.1 in August (chart). According to last month's survey of 5,000 respondents, consumers are more pessimistic about both present economic conditions and the outlook for the next six months than they were in August. The index that measures how households feel about current conditions fell to the lowest level since the 1981-82 recession, although the recovery supposedly began in April or May.

The survey says that 40.2% of consumers think jobs are hard to get--also the worst reading since the 1981-82 recession. This perception suggests that the unemployment rate, now at 6.8%, is underreporting the true number of people pounding the pavement.

It isn't just jobs, though. Consumers are losing sleep over other troubles, too. Total consumer debt outstanding has skyrocketed to a record 96.1% of yearly aftertax earnings, up from 70% 10 years ago. During the 1960s and 1970s, the ratio was fairly steady at about 65%.

Slow income growth and a perilously thin cushion of savings mean that households are having a hard time paying their debts: The delinquency rate for all consumer loans rose to 2.73% in the second quarter, the highest level in almost two years.

Lower interest rates have hurt consumer finances more than they have helped. That's because, for most families, lower rates have pushed down interest income faster than they have lowered borrowing costs. Through July, net interest income was falling at the steepest annual pace in the postwar era. Rising taxes at all levels of government are also draining household incomes.

Add it all up, and it is easy to see why consumers are so downbeat--and why the forecasters' modest projection of 2.4% growth in consumer spending for next year might not be modest enough.


The business economists also have low expectations for capital spending and housing. They look for investment in new buildings and equipment to grow only 3% in 1992, after a decline of about 3% in 1991. And housing starts will average 1.25 million next year, they say, up from 1.04 million this year.

The latest news from the construction industry is mixed, but it supports the economists' view that the industry is recovering--slowly. The F. W. Dodge Div. of McGraw-Hill Inc. says that new construction contracts increased by 4% in August on top of a 7% rise in July.

Lower interest rates are at least boosting builders' spirits, although their impact on demand remains to be seen. The National Association of Home Builders reports that builders were more optimistic in September than in August. That was the first time since April that expectations rose, an indication that buyer traffic, after falling off in the summer, may have picked up.


One of the bright spots in the economy in recent months has been manufacturing. Factories are producing more mainly because the pickup in demand immediately after the war left inventory levels too low. But if those output gains are going to keep chugging along, consumers will have to keep stoking the fire.

Factories appeared to lose a little momentum in August. Industrial production posted the smallest gain since March, and new mrders received by makers of durable goods fell 3.8%. However, the drop was from a high level (chart). Orders in July had surged by a record 11.7%.

Bookings for both July and August are well above the second-quarter average, meaning that factory production added to GNP growth in the third quarter. The key question: Will that output be bought by consumers or end up on inventory shelves? If it goes into inventories, fourth-quarter growth could suffer.

The latest readings on consumer demand look weak. Sales of existing homes fell for the second consecutive month in August. They were down 2.1%, to 3.25 million, following a 7.5% drop in July. And sales of new domestically made cars in mid-September came in at a disappointing 6.4 million annual rate, despite heavy buying by fleet owners. So far in September, car sales are running at only 5.8 million. That's below 6.1 million in August, which was down from 6.8 million in July.

But while the outlook for domestic spending is uncertain, foreign demand should remain a steadfast contributor to the factory rebound heading into 1992. Exports accounted for a record 22.3% of industrial output in the second quarter.

However, if the forecasters are right, the trade balance will not be a major force in the overall economy in the coming year. That's because any gains in exports will be offset by rising imports. Indeed, the merchandise trade deficit widened to $5.9 billion in July, from $3.8 billion in June. Imports surged 6.2%, to $41.2 billion, in July, while exports rose 0.8%, to $35.3 billion.

Foreign demand will continue to be a bright spot for manufacturers in 1992. In July, exports were 9.7% higher than a year ago. Leading indicators hint that foreign economies are starting to strengthen. And a cheaper dollar will also help.

Since late June, the dollar has lost 4% of its value against other currencies (chart). If the Federal Reserve cuts interest rates again, as seems likely, further declines in the exchange rate will make U. S. goods even more competitive.

The business economists believe that further easing moves by the central bank are a good bet. A large 45% of them characterize monetary policy as "still too tight." In fact, the fate of the forecasters' projections may well be in the hands of the Fed. That's because even lower interest rates may be the only way to get consumers out of debt, out of the doldrums, and back into the stores.

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