The Binge Is Over

Early this year, the Park family of Murray Hill, N.J., rushed to buy a house before mortgage rates shot up. Then they loaded it with a new refrigerator, television, and bedroom set. Now they're giving their depleted bank account a rest. "We can't just go out and buy whatever we want. We need to put some money on reserve," explains Sungmin Park, a Wall Street systems analyst.

He's not alone. The consumer buying binge of late 1993 and early 1994 is grinding down. Consumer spending rose just 1.2% in the second quarter, down from 4.7% in the first (chart). The sudden drop caught some retailers and wholesalers by surprise, contributing to a $54 billion inventory buildup in the second quarter--more than double the first quarter's annual inventory rate of $25.4 billion.

"DEMAND IS THERE." The big question now: Will consumers start gobbling up goods again in the second half of the year? President Clinton's advisers maintain that the inventory buildup will quickly be cut down to size by strong demand. But pessimists believe the glut will weigh heavily against economic growth. "The surge in consumer spending is behind us," notes Laurence H. Meyer, a St. Louis economist. He expects the pace of economic growth to slow from 3.7% in the second quarter to 2.5% in the third, and 3.1% in the fourth.

Still, it's hardly panic time. Second-quarter sales of motor vehicles and parts dropped nearly $5 billion against the first quarter, to $209 billion. But that's partly because popular car and truck models were in short supply. The Big Three auto makers are maintaining 56-day inventories of vehicles on dealer lots, well below the 60 to 65 days typical for the industry. "There don't seem to be enough cars to buy," says Daniel D. Bachman, senior economist at the WEFA Group, a Bala Cynwyd (Pa.) consulting firm. "The pent-up demand is still there."

Some companies, moreover, loaded up inventories on purpose--and consumers could benefit. At Compaq Computer Corp., inventories soared 57% in the second quarter as the computer maker pushed to eliminate backlogged orders. That could drive prices lower, perhaps even sparking a PC price war, notes Kimball Brown, a vice-president at Dataquest Inc.

There are some reasons for concern, though. Retail inventories soared in May, when sales ran behind expectations, and many merchants still have excess goods piled up. "You buy inventories well in advance. Even if the sales don't come, the products still do," notes V. Hollis Scott, senior vice-president of Cato Corp., a chain of 625 women's apparel stores based in Charlotte, N.C.

Consumers also are less enthusiastic than they were a few months ago. The University of Michigan at Ann Arbor's consumer confidence index dipped to 89.0 in July from a January peak of 94.7--reflecting concerns about higher interest rates. And in May, credit-card debt hit $308 billion, or 6.3% of disposable income, up from $268 billion, or 5.7% of disposable income, in May, 1993.

Fearing such debt, some consumers are cutting back. Denver banker Michael C. Lucchino, for one, is cleaning up his personal balance sheet so he

can buy a house next year. "I'm paying cash instead of credit," he says. If the nation's Lucchinos and Parks hold to such resolves, the economy may suffer.

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