Clues to Economy in New-Fashioned Signals

While government, economic and business leaders sift through traditional economic indicators to search for clues about the direction of the economy, they might also want to take a look at some very real but non-traditional economic signals that could provide some helpful insights.

Since last year, consumers have had to pay simultaneous and substantial increases in some typical expenses, such as property taxes, health care, auto insurance, adjustable-rate mortgages and tuition. The extra money committed to these non-discretionary expenses has crimped the funds that consumers have left to spend on discretionary items, such as entertainment, dining out and travel.

The diversion of discretionary income to pay for escalating non-discretionary expenses has already provoked activism by consumers, whose spending represents about two-thirds of our economy. It also has forced consumers to choose between products that they can and cannot afford, shifting their spending habits from acquiring status-seeking goods to paying bills in an effort to maintain the status quo.

Businesses capable of appealing to these price-sensitive buyers can expect substantial returns. Conversely, companies unprepared for the changed environment may find themselves at a competitive disadvantage.

According to traditional economic indicators, the economy is chugging along. However, the discretionary income squeeze, a non-traditional but crucial clue to the economy’s direction, suggests that things are not what they seem in economic analyses. As a result, traditional responses, such as money supply controls and interest rate adjustments, could prove ineffective simply because they do not address the problem areas. Although interest rate adjustments could affect mortgage rates, other traditional responses would not lower car insurance premiums or health-care costs, and, as a result, they will not ease a large portion of the expense pressures currently squeezing the consumer.

A brief look at several of these non-discretionary expense categories dramatizes the magnitude of this shift.

Auto insurance: From 1982 to 1987, soaring legal, medical and car repair expenses lifted auto insurance premiums nationwide an average of 63%. Consumer revolts such as California’s Proposition 103 targeted enormous policy rate hikes.

Some frustrated consumers have turned to more direct and personal rebellions, such as not carrying any insurance. In 1988, for example, nearly one-third of all motorists stopped for violations in California were unable to show proof of insurance.

Health-care costs: Spiraling health-care costs are not new in this country. However, with insurance costs rising 20% to 40% a year, companies that have traditionally shouldered the entire burden of health-care payments have started to shift part of this cost to their employees. Nearly 43% of companies in the manufacturing sector and 50% in the retailing sector now require employees to pay part of their health insurance premiums.

In addition, employers are asking employees to absorb larger deductibles and be responsible for more of the uninsured payments. For example, beginning in July, 1988, General Motors, which previously paid basic health coverage for employees and retirees, started requiring them to absorb part of those costs. This change increased the annual out-of-pocket expenses of employees by as much as $500.

Health benefits have been at the crux of many labor disputes this year. If recent negotiations, such as those at the regional Bell companies and steel firms, are any indication, it appears that the focus of future labor talks will shift from a concentration on wages to a broader approach that includes health benefits.

Adjustable-rate mortgages: To help extend the market for home buyers, mortgage lenders attracted borrowers with artificially low “teaser” rates on their adjustable loans. As these introductory rates have risen to market levels over the first year or two of these loans, some increases have been enormous. For example, early in 1988, teaser rates were as low as 7%, but by mid-1989, many of these rates were up to 11%, which represented a 43% increase in the homeowner’s monthly mortgage payment. On a $150,000 mortgage, this translates to a monthly payment of $1,420, up from $998.

Nearly half of all new first mortgages in the nation are adjustable, and when new second mortgages are included, the figure rises to nearly two-thirds. As a result, adjustable mortgage increases have had a widespread impact on consumer discretionary income. This has affected consumer attitudes, as evidenced by a recent Gallup poll in which American families said their No. 1 economic fear was an inability to meet their mortgage obligations.