Thriftier Consumers Spur Fears of Recession in 1990
After years of spirited spending, U.S. consumers are showing new restraint in their purchases this year, a trend that could nudge the economy toward a recession if it persists, analysts say.
“If consumer spending continues as it has in the last three months, we could be headed for a recession in the next three months,” warned Bruce Steinberg, a senior economist with the Merrill Lynch investment firm in New York.
Economists are far from ready to declare America’s 90-month economic expansion to be over, but increasingly they are asking: Is the free-spending, luxury-loving consumer of the 1980s pooping out in the 1990s?
The question is important because spending on autos, furniture, appliances, clothing, entertainment and other consumer products and services accounts for two-thirds of the U.S. economy. Confident consumers are willing to part with cash; their spending has propelled the longest peacetime economic expansion in the United States since World War II.
Worried consumers, by contrast, hold their dollars with great care, depriving the economy of a basic source of growth. And recent signs suggest that worries are on the rise.
In May, for instance, retail sales dropped 0.7%. It was the third consecutive monthly decline--and the longest downward streak in nine years, the Commerce Department reported. The government’s broadest gauge of consumer spending, which also includes dollars spent on services, also has been falling in recent months.
“It’s been tough,” said Bill Dombrowski, vice president of corporate affairs at Carter Hawley Hale Stores, a Los Angeles-based retailing company that owns the Broadway department stores. “It was a tough quarter for everyone.”
The firm, along with other major retailers, has had disappointing sales in furniture and other “big-ticket” items, Dombrowski said.
“Consumers are being a little more cautious,” said Rosalind Wells, chief economist with the National Retail Federation in New York. But she added quickly: “I don’t think things are falling apart.”
There is no shortage of explanations for the consumer malaise. Sluggish employment growth is often cited. So is the real estate slowdown in the Northeast and California. Some economists take the long-term view, pointing to the aging of the baby boom generation and, with it, a growing emphasis on saving instead of material indulgence.
Even the weather, which was unseasonably cold and wet in much of the country last month, gets its share of the blame. “The normal summer goods didn’t really sell in a big quantity,” said Thomas E. Swanstrom, chief economist with Sears Merchandise Group in Chicago.
Meteorology alone, however, does not explain the chillier consumer. Employment growth, for instance, has been weak to nonexistent in certain key sectors of late. In May, for instance, factory jobs fell for the seventh time in nine months. Such declines not only injure those affected directly but also spread ripple effects of anxiety.
“You get eight to 10 people scared for every one laid off,” said Donald Ratajczak, an economic forecaster at Georgia State University.
Gradually, the fears may be spreading. A year ago, 34% of Americans polled by the Conference Board described jobs as “plentiful,” with 21% responding that jobs were hard to get. By contrast, in a similar survey last month by the New York research organization, just 27% said jobs were plentiful and 23% said jobs were hard to get.
The comfortably employed have other concerns. Many have watched with dismay as a chill in housing markets has spread from the Northeast to California and some other regions. New York median housing prices, for instance, are running 5% lower than a year ago, according to the National Assn. of Realtors.
In California, median home prices overall are down 2% from a year ago, although they are up about 2% in Los Angeles and Orange counties, according to the California Assn. of Realtors. Still, the modest gains are a jolting turnabout from the heady real estate appreciation of the recent past.
“I think the No. 1 thing that’s causing middle-class households concern is the slowdown in housing prices,” said Robert H. Dugger, chief economist at the American Bankers Assn. in Washington. “So many of them viewed their home equity as an important indicator of their household wealth.”
Other indicators suggest that consumers are changing for reasons more basic than housing prices. In the go-go 1980s, wealth--or the illusion of it--was fueled by a rapid rise in borrowing. This year, household borrowing is going up more slowly than in the past, and many consumers appear to be paying back their debts, Dugger said.
Some experts contend that this phenomenon might partly reflect the aging of the population, especially the baby boom, which is pushing into its 40s. Consumers typically save more as they settle into middle age and start to plan for such long-term expenses as retirement.
“They’ve got their houses. They’ve got their cars. They’ve got their furniture. They’re pretty well set,” said Edward Yardeni, chief economist at Prudential-Bache Securities in New York. “As they get older, they realize they’re not immortal and start putting money aside for their children’s education.”
Consumer saving rates--computed as a percentage of disposable income--have edged up to 5.6% in the first quarter of this year from 3.2% in 1987, according to the Commerce Department. The view that a long-term spending shift has started to affect the economic statistics is in dispute, however. For one thing, the 1990 savings rate figures may be reduced next month because of lower official estimates of income growth, economists said.
“Savings is maybe edging up a little bit--from a very, very low level,” said Joseph A. Wahed, chief economist at Wells Fargo Bank in San Francisco.
Inflation also has created uncertainty about consumer attitudes. Earlier this year, it soared to an 8% annual rate, pushed by cold-weather-related increases in the prices of heating oil and food. Although it eased to less than 3% in April and May, some say government officials are underestimating the price pressures that consumers now face.
The consumer price index, for example, does not sufficiently weigh such expenses as insurance, state and local taxes and utility bills, many of which have been moving up, Albert E. Sindlinger, an economist who runs a consumer research firm in Wallingford, Pa., contends.
Using his own formulas, Sindlinger calculates that income gains--averaging in the 4.5% range--have lagged behind inflation--at more than 7%--for several months, causing a crunch that is damaging the U.S. economy in many regions. “Eight of 10 people now are telling us their income is down because their fixed costs are up,” Sindlinger said.
Despite the rising concerns about the consumer, the economy retains strength in exports and manufacturing. The Conference Board’s index of consumer confidence has dropped from a level of 116.7 last May to 107.3 this May, but it remains substantially above levels associated with a recession.
New signs of weakness may prompt the Federal Reserve Board to lower interest rates, which could spark a rebound in the housing industry. And economists point approvingly to lean inventory levels in the auto and other industries, a situation that reduces the possibility of harmful industrial bottlenecks.
“This is unusual and very scary,” Wahed said of the three-month series of retail sales declines. “But I still lay odds of 4 to 1 that this will not cause a recession in the near future.”
CONSUMER SPENDING GROWTH SLOWS Annual rate of growth of personal consumption expenditures. 1985: 4.7% 1986: 3.9 1987: 2.8 1988: 3.4 1989: 2.7 1990 (first quarter): 2.4 Source: Commerce Department
