Consumers May Hold Clue to Direction of Economy
The tumultuous stock market has inspired images of the apocalypse: “Meltdown,” “Armageddon,” “blood bath” and similar terms all have been used to describe Monday’s historic plunge, in which stocks lost half a trillion dollars in value.
But whether such dark descriptions turn out to be on target or just overheated rhetoric will not be known for months, as the troubled market tries to recover its lost ground. Already, the effects are rippling through the U.S. economy, hurting some people, helping others and leaving a big majority of bewildered bystanders who--for the moment, at least--are wondering what all the clamor is about.
Only 47 million Americans own stock, either directly or in mutual funds, according to the New York Stock Exchange, in contrast to some 200 million who do not. “I don’t think there’s much to worry about,” said Ken Ehlers, a bus driver from Baldwin Park who is witnessing Wall Street’s trauma from the sidelines. “I feel the government won’t let it go too far. It’ll step in.”
Nonetheless, the bludgeoning of the bull market is already beginning to affect those who have never had cause to look up a single stock quote in the newspaper. Interest rates have dropped dramatically as money has flowed from stocks to bonds, a trend that could enable many Americans to purchase homes who could not afford to make the monthly payments just a week ago.
At the same time, the market’s helter-skelter leaps and dives have made some consumers wary of major purchases. And that is the sort of behavior that could drag down the economy and usher in a self-fulfilling recession.
A person’s age and investment strategy dictate vulnerability in the current financial tempest. To young people with money in long-term stock funds, such as many individual retirement accounts, the decline amounts to a “paper loss,” one that they have years to recover from. But for workers near retirement, who were counting on stock portfolios to help pay the bills in the near future, the market plunge is anything but abstract.
Impact Worldwide
Together, all these economic cross-currents have spread financial unrest throughout the world, and they have highlighted the vulnerabilities of the U.S. economy at a time in which it approaches the fifth year of a recovery.
“Where you start to get the concern is in how are consumers reacting,” said Murray L. Weidenbaum, director of the Center for the Study of American Business at Washington University in St. Louis and a former chairman of President Reagan’s Council of Economic Advisers. “To what extent will consumers shave their purchases, postpone, buy smaller items? This is a period of rethinking, of re-examination.”
For some, the re-examination has been unpleasant, to say the least. Fulton Sanford, 60, invested the bulk of his money in the savings plan of his employer, Rockwell International, where he works as a program business manager. In recent days, he has seen the value of his nearly 11,000 shares of Rockwell plummet from a 52-week high of $30.875 a share to $14.875 at Monday’s close--for a loss of greater than $160,000 at the lowest point. (Rockwell stock rebounded to 19.875 as of the close on Friday.)
“It’s a good stock, and I feel it’ll go back up, but if it doesn’t before I retire, I’ll be hurting,” said the Eagle Rock resident, who plans to retire next January after 24 years with the company.
Older Workers Vulnerable
“These people are stuck,” Ellen Sloan, a financial planner with the Mutual Benefit Life Insurance Co. in Los Angeles, said of older workers stung by losses in their stock portfolios. “If the market continues to stay down for the next couple of years, this could significantly change their outlook and the kind of life style they’ll be able to live.”
People’s reactions have been unpredictable and diverse. Sloan, 31, who has put off plans to trade in her 1974 Volvo for a new Jeep Cherokee, has one client, a retired dietician, 65, who decided to move $85,000 out of mutual funds, after the market drop. The woman switched the money into a kind of life insurance, known as “single premium,” that offers tax-deferred investment income.
Yet a more adventurous client, a 45-year-old consultant, was eager to plunk down a recent windfall of $50,000 for new stock purchases, a move Sloan counseled against. “I told him he was lucky he didn’t get the money a month earlier,” observed the financial planner who has counseled clients to limit--though not necessarily eliminate--stock investments.
Ultimately, the behavior of millions of Americans will determine whether the financial damage to the stock market is contained or goes beyond it to undermine the rest of the economy. And that behavior is being influenced not only by the hard reality of how much money they have but also by the intangible of how much confidence they have that hard times are not imminent.
‘Sense of Uncertainty’
“Regardless if you had money in the stock market or not, that has to create a sense of uncertainty,” said David Stewart, an expert in consumer psychology at USC. Consumers, he added, will ask: “What’s going to happen to me?”
The initial hours after last Monday’s crash provided scattered, anecdotal evidence of an economic chill, but it seemed to fade a bit during the week, as stocks made a modest recovery. “We have been very quiet--we have not sold a car since last Friday,” Dean Murphy, 25, a salesman at Zipper Porsche in Beverly Hills, said in a midweek interview. “We usually sell one a day.”
At Splendiferous in the Westside Pavilion, which features a tony inventory of party dresses, shoes and other items, “business dropped to almost zero,” after the market crashed last Monday, said a saleswoman who identified herself as Filly Valentine. “They’re luxury items,” she shrugged.
But at Southland Motors in West Covina, potential buyers for $50,000 Jaguars seemed to regain some of their confidence rapidly. “They (customers) were hesitant--maybe they waited a day or two before buying,” said Bob Curtis, Jaguar sales manager. “But the panic was off in 24 hours.”
Other Fears
While the panic fed on itself as stocks barreled relentlessly toward--then beyond--unheard of lows, many investors also were responding to fears of higher inflation and interest rates, in light of the persistent U.S. deficits in trade and the budget. To many experts, however, the state of the nation’s economy does not seem to be a cause for panic, even given its weaknesses.
On Friday, for example, the government said that consumer prices rose a modest 0.2% in September, reinforcing the view that inflation remains under control. And, on the same day, officials reported that the gross national product, a broad gauge of overall economic growth, was moving forward at the higher-than-expected rate of 3.8%.
More Americans are employed than at any time in history, and U.S. manufacturing is beginning to compete more effectively with its foreign rivals. “Unlike the financial markets, the real economy is expanding nicely,” Weidenbaum observed.
This view was widely shared among analysts shortly before the market collapse. In an early September survey of economists by the Blue Chip Economic Indicators newsletter in Sedona, Ariz., 92% predicted the next recession would not take place until 1989 or 1990. Only 4% forecast a recession for this year, while another 4% said it would happen next year.
But already the professionals are getting more pessimistic. “If we were doing that survey today, I think the 4% (who had expected a recession in 1988) would go up to 16%,” said editor Robert J. Eggert.
A Plus for Housing
A sudden and dramatic decline in interest rates has pulled down mortgage rates, offering many an unexpected entree into the housing market. Fixed-rate home loans, which had exceeded 12% just before the stocks fell, have since dropped nearly a percentage point. Such a one-point drop, if sustained, would mean an extra 150,000 to 250,000 home sales in the course of a year, many in the lower price ranges, according to John Tuccillo, chief economist with the National Assn. of Realtors in Washington.
The drop in mortgage rates “would definitely help business,” said real estate agent Joe Henderson at Castagna Realty in Los Feliz. “It would make more people qualify for a loan.”
In addition, drops in rates can put money in the pockets of those paying adjustable rate mortgages, a set-up in which payments are periodically moved up or down to reflect interest rate levels. But at the same time, Tuccillo predicted, wealthier home buyers who lost money in the market “will begin to move down the price ladder.”
Consider the case of Al Frank, editor and publisher of the Prudent Speculator newsletter in Santa Monica. Frank estimated that his stock holdings have dropped between $400,000 and $500,000 in value. In response to the market, he and his wife have postponed a $250,000 remodeling project for their home. “A $1,000 gift may become $500,” he said, adding that it “depends on how tight things get.”
Effect on Big Ticket Items
Frank is an example of somebody whose wealth has been affected directly by the fall in stock prices. According to economists, 5% to 10% of shifts in wealth ultimately translate into spending, although this can take months or even years to happen. What troubles analysts and government officials even more is the notion that financial worries will cause the general public to refrain from buying cars, homes, refrigerators and all the other sorts of things that keep an economy growing.
Critical Role
Such consumer spending has played a critical role in sustaining the U.S. economy during the last few years. As a result, consumer habits in the coming weeks and months, including the crucially important Christmas season, will help determine how much the pain on Wall Street is going to be shared with everyone else.
Economist A. Gary Shilling recalled that he recently met a woman in Huntsville, Ala., who told him that her mother was advising family members to limit Christmas gifts this year to $5. If such sentiments prove common, the result could be a recession. “The acid test is going to be what happens to Christmas sales,” said Shilling, who this week visited clients in Ohio, Alabama and Texas.
Shilling, who argues that consumers have been spending and borrowing far too much money relative to their incomes, maintained: “The (recession) stage was set. All we needed was the first note from the orchestra. I think we’ve heard that first note and it was a very loud and clear one.”
Throughout America, corporate officials are waiting anxiously to find out if that view is correct: “We are watching sales with great anticipation,” said Jules Zimmerman, senior vice president and chief financial officer of Avon in New York. “Consumers are concerned today. They question what this means and wonder what they should squirrel away in case things get worse.”
For many, the stock plunge may be triggering a reappraisal of personal as well as financial values.
‘They Were Greedy’
Kathleen Gurney, president of Financial Psychology Corp., a research firm in Los Angeles, said some of her clients now feel their desire for wealth blinded them to the risk they were taking. “Many of them are angry at themselves because they were greedy,” said the psychologist, whose clients include brokers, insurance agents and accountants. “They’ve learned a great lesson.”
He Saw It Coming
One of those who saw the coming collapse is A. W. Mitchell, 70, president of a medium-sized construction company in Sherman Oaks, and old enough to retain memories of the Great Depression. Two months ago, Mitchell began shifting savings from stocks to bonds. But when the recent crash occurred, more than one-third of his savings were still in the stock market. His mutual funds alone lost 28% of their value in just two days.
“I took a beating on some mutual funds which I could have sold out of but didn’t,” he said. But Mitchell, who intends to retire next year, has not lost all his faith in the market. Like many others, he pulled himself back on his feet, spoke to his broker--and was buying more stock the day after “Black Monday.”
Staff writers Keith Bradsher, Nancy Rivera Brooks, Martha Groves, Bruce Keppel, Carla Lazzareschi, Jesus Sanchez and Nancy Yoshihara also contributed to this story.
