Again, Consumers Are Carrying the Load
By Amey Stone
No sooner do economists agree that the economy appears to be coming out of recession than a new crop of worries surfaces. Now they fear that the factors that helped the economy stabilize may prove all too fleeting.
Without new demand for goods and services, the economy could start sliding again, with the U.S. winding up in a "double-dip" recession. What about business spending as a stimulus for demand? Forget it. Fourth-quarter corporate earnings in 2001 were down about 20% from the same quarter in 2000, and until companies can show higher profits, they're unlikely to start spending more.
In an all-too-familiar refrain, that leaves the job of keeping the economy afloat up to consumers. Luckily, in the U.S. they seem up to the job. Some economists wring their hands that consumer spending has remained so strong throughout the recession that little oomph is left to fuel a rebound.
However, no evidence supports that worry yet. In fact, as long as the job market continues to improve, there's every reason to think consumers will not only keep buying but will start spending even more. "I think the consumer will hang tough," says Mark Zandi, chief economist at consulting firm Economy.com.
Overall, the picture is improving, as Federal Reserve Chairman Alan Greenspan told the Senate Banking Committee on Jan. 24. He noted that economic activity is "beginning to firm." And given his upbeat message, the Fed isn't expected to cut interest rates again following its two-day meeting on Jan. 29 and 30. There's even a slight chance of a positive number for fourth-quarter gross domestic product due out on Jan. 30, although most economists don't expect growth to officially resume until later this spring. "I don't think we're out of the woods yet, but I think we soon will be," says Zandi.
So with widespread belief that the recession is ending, why isn't Wall Street celebrating so far this year? For one thing, corporate profits are still sliding. Even though Greenspan says he thinks inventory restocking will give the economy a boost, "that impetus to activity will be short-lived unless sustained growth of final demand kicks in," he warned on Jan. 24.
Plus, stocks already ran up late last year on hopes the recovery would include increased business spending, especially in the battered tech sector. No such luck so far. Despite a few pockets of strength, like data backup, tech bellwethers Intel, Microsoft, and IBM were downbeat during their earnings announcements. John Lonski, chief economist at Moody's Investor Services rating agency, believes the economy will end 2002 at a 3% growth rate, which may not be enough to justify current stock prices.
What the markets and the economy are counting on is ever-resilient consumers. Their confidence, as recorded by the University of Michigan and the Conference Board (which releases its latest report on Jan. 29), is rebounding. Thanks to lower energy costs, tax-rebate checks (which most people saved rather than spent), and mortgages refinanced at lower rates, many households have extra cash to spend as their moods improve. Although terrorism fears linger, the economic fallout from the September 11 attacks seems to be fading.
Other encouraging signs are popping up as well: December new-home sales, reported on Jan. 28, were surprisingly strong, and home values continue to rise, offsetting declines in investment portfolios for many people. Motor-vehicle sales are also doing better than expected, despite the end of 0% financing. In some cases, retail chain-store sales are coming in ahead of estimates for January. As for the continued decline in initial jobless claims recorded by states, Lonksi says he's "dumbfounded," and he "just continues to be amazed at how well the economy is doing."
Lonski may be in for more amazement. Consumers may actually be set to boost their spending. Even if it seems that home and auto sales can't possibly surge the way they typically do coming out of a recession, other sectors of the economy should make up for that. Travel ought to get a big boost as consumers reschedule trips they postponed following September 11. Consumer-electronics purchases are showing signs of picking up as innovation in personal computing drives demand. Both Apple and Dell reported recently that sales to consumers have been stronger than they expected.
Lonski also expects to see pent-up demand for household goods, since sales of furniture and appliances have lagged behind the brisk pace of home sales. Likewise, he thinks general-merchandise and retail sales hit such a low level that they have room to rebound as confidence improves. Meantime, consumers have plenty of spending power available in the form of low-interest credit cards and loans. Individuals' debt levels have started declining and "are not a problem" for middle- to upper-income households, says Zandi.
HELP FROM WASHINGTON?
Debt is a problem, however, among moderate-income Americans, where delinquencies on loans and personal-bankruptcy filings are rising. With high consumer-debt loads and the possibility of the U.S. economy experiencing an outside shock -- such as war in the Middle East -- the nascent consumer-led recovery is vulnerable.
Donald Luskin, chief investment officer at TrendMacrolytics, thinks a change in fiscal or regulatory policy is needed to get the economy back on course. "We've fallen from such a height that I think it will take a while longer to heal," he says. Zandi agrees: "The economy could use some help from policymakers."
Without it -- even if consumer spending is surprisingly strong -- the recovery may not be powerful enough to lift the stock market much, which explains why the improved economic outlook isn't getting cheers these days on Wall Street. But on Main Street, where people are more worried about keeping their jobs than about short-term market results, the recent economic news is at least adding a little skip to their step.
Stone is an associate editor of BusinessWeek Online and covers the markets in our daily Street Wise column
Edited by Beth Belton