Consumers Are Rocking, And Factories Are Rolling

From all early-bird signals, consumers are making the holidays bright for the U.S. economy. They are in better spirits, less worried about the future, and spending freely on items big and small.

No one could be more pleased by all this than U.S. manufacturers. The factory sector has spent most of 1993 in the doldrums, depressed by defense cuts, weaker exports, and sagging orders generally. Now, thanks to consumers, manufacturers are looking at better times that should last well into 1994--at least.

It's not that consumers suddenly woke up in time to play Santa. Consumer outlays rose at an annual rate of 3.4% in the second quarter, 4.4% in the third, and they are on track to match that pace this quarter. It will be the best three-quarter performance in five years.

This is not profligate spending, mind you. Excluding flood- and drought-depressed farm income, consumer outlays are growing apace with income, reflecting better job growth. And don't forget low interest rates, extra cash from refinancing, and quiescent inflation--including OPEC's gift of cheaper fuel. Add it up, and spending growth looks not only healthy but sustainable as well.

Manufacturers are reaping the benefits. The flow of new orders in recent months has gone from a trickle to a gush. Factory orders for durable goods such as cars, furniture, and machinery rose 2% in October, the third consecutive increase, to an all-time high.

Brisk demand has caught factories with their inventories down, especially auto and truck makers. Emptier warehouses suggest stronger output well into the new year, as producers rebuild their inventories. And with the factory workweek already historically long, more hiring may be in the offing as well.

The manufacturing zest continued in November, according to the National Association of Purchasing Management. The NAPM's composite index of industrial activity rose to 55.7% from 53.8% in October, fueled by a second-consecutive robust gain in new orders (chart). Except for January, the orders index was the highest in six years. In addition, the purchasers said that production was also the highest since January, and their employment index increased for the third consecutive month.

Because of the improving outlook for consumers and the ongoing rush of capital spending on equipment by businesses, the factory sector's near-term prospects are the best in years. Of course, manufacturers will continue to bear the brunt of military cuts, weaker foreign demand, and an ever-rising tide of imports.

The inflow of foreign goods showed no sign of ebbing in the third quarter. The Commerce Dept. reported that imports rose at an annual rate of 6.1%, rather than the 1.9% pace originally reported. That upshift was the chief reason for the slight downward revision in third-quarter real gross domestic product from a gain of 2.8% to 2.7%.

However, factories are leading a fourth-quarter acceleration in output that appears to be lifting real GDP growth in excess of 4%. Manufacturers are riding into the new year on the crest of a simultaneous upturn in housing and autos. Those two industries, like no others, still have broad secondary impacts on a variety of U.S. markets and producers.

Sales of domestically made cars and light trucks picked up sharply in October, to an annual rate of 12.5 million from 11.2 million in September, and car buyers were still out in force last month. In mid-November, cars and light trucks sold at an annual rate of 12.5 million, after posting a 12.4 million rate early in the month.

That healthy pace has reduced inventories to the point where Detroit may have to add to its already hefty production plans for the first quarter of 1994. Car production is contributing strongly to fourth-quarter industrial production and economic growth generally. Carmakers' output schedules already imply another, although smaller, boost next quarter, led by a record production level for light trucks, which now account for 46% of domestic-vehicle output.

Manufacturers are also benefiting from the rebound in housing. Low mortgage rates propelled a 3.6% rise in sales of existing single-family homes in October, the sixth increase in the past seven months, reported the National Association of Realtors. Sales hit an annual rate of 4.08 million, the highest level in 14 years (chart).

Strong housing demand is generating a rash of new construction that is giving economic growth a big boost this quarter. Construction spending rose a hefty 2.5% in October, and the government revised the September increase from 0.8% to 1.5%. The October gain was the sharpest in a year and a half. The advance sets outlays on a high plane starting the fourth quarter, assuring a sizable contribution to growth in real GDP.

As it always does, the housing rebound is fueling demand for a broad range of consumer items, especially big-ticket household goods. In fact, the way holiday sales are shaping up, retailers may well see the 1993 gains match the strong performance of yearend 1992.

The Johnson Redbook Report shows that sales at the nation's department and discount stores rose a seasonally adjusted 0.7% in November from October. That puts last month's sales nearly 9% ahead of receipts in November, 1992. In addition, stores indicated strong business in the days after Thanksgiving.

Consumers may well be waking up to the reality that things aren't as bad as they had thought. After posting pessimistic readings in the spring and summer, consumer confidence surged in November (chart). The Conference Board's index jumped 11 points, to 71.2, fueled by consumers' better assessment of their present situations and brighter expectations for the future.

The gain was one of the largest in the survey's 25-year history. And unlike other jumps in recent years, this one was unrelated to one-time events, such as the Presidential election or the gulf war victory. It may simply be that consumers are finally feeling the recovery.

In particular, households said current conditions last month, while still not great, were nevertheless the best in nearly three years. Moreover, that component of confidence scored the biggest monthly increase in five years.

A key survey response was households' opinion of the employment situation. The proportion of people reporting that jobs are "plentiful" rose, while the share of those who feel that jobs are "hard to get" dropped to a three-year low. That's a good sign that the job market is improving, which is a major reason consumers are increasingly willing to plunk down the big bucks for cars and homes that they were reluctant to spend before.

Based on a survey taken earlier this year, which showed that one in three consumers had postponed a major purchase because of uncertainty over the economy, Conference Board economist Fabian Linden believes that further increases in confidence will unleash even more of this pent-up demand.

Consumers should also benefit from OPEC's failure to cut oil output. The rule of thumb is that a $1-per-barrel drop in oil prices, if sustained for a year, cuts 0.2 to 0.3 percentage points off the annual rate of consumer price inflation. Since October, the price of crude oil is down more than $3 per barrel.

Already, the January contract prices for heating oil and unleaded gas have plunged to five-year lows in the futures market (chart). The decline more than offsets the impact of the 4.3 -per-gallon increase in the federal gasoline tax that took effect on Oct. 1.

More buying power, generally, is only one of the positive fundamentals underlying the near-term outlook for consumer spending. That's why manufacturers are likely to remain in good spirits even after all the New Year's parties are over.