Uncertainty by Consumers Cools Recovery

Liesel Friedrich knows what is bedeviling economic policy-makers: She is, as are thousands of consumers like her.

In the last several months, the Santa Monica housewife has gotten a $70 break on her monthly adjustable rate mortgage payments thanks to recent sharp interest rate reductions spurred by economic regulators.

The government hoped these reductions would increase consumer confidence and spending and help jump-start the nation’s stalled economy. That is the way traditional economic policy has worked.

So far, Friedrich has not stepped up her spending, nor have many other consumers. Economists are beginning to suspect that it will be more difficult to get consumers back into the malls and auto showrooms than during previous recessions.

“Consumers are in a different mind-set. They are turning away from conspicuous consumption,” said Jack Kyser, chief economist at the Los Angeles Area Chamber of Commerce. “The (government) is pushing on a string. They can lower interest rates, but if banks won’t lend and consumers won’t borrow, what good does it do?”

Economists say the reason traditional economic solutions are not working is because of the unusual set of converging forces affecting consumers, businesses and government.

After the buying--and borrowing--boom of the 1980s, many people seem content to save or pay down their debts. Others simply have less money to spend, either having been laid off or having had their hours and paychecks cut. There are some demographic changes, too: Aging baby boomers are becoming more conservative and reorienting their spending priorities.

At the same time, businesses also are weighted down with debt, the hangover from the buyout and merger mania in the last decade. Many are consolidating rather than expanding. The problems of banks and thrifts have created a “credit crunch,” with loans tough to get.

Finally, governments at all levels are facing budget deficits. They are cutting back services and considering raising taxes to balance their ledgers. Higher taxes further dampen consumer spending.

“We have seen some cyclical and structural changes that will make it more difficult to jump-start the economy with lower interest rates,” said Gary Schlossberg, senior economist with Wells Fargo Bank.

Although the economic recession may become longer than expected, some economists argue that the reduced spending and increased savings by consumers will be good for the nation, which has one of the lowest per capita savings rates among industrial countries. The lack of savings has made the United States the world’s largest debtor nation, forcing the government to pay high interest rates to attract capital to service its huge deficit.

Still, many economists believe consumers are the key to ending the recession. That is why the Federal Reserve has moved to reduce interest rates sharply in the last several months. Since last summer, when the rate-slashing started in earnest, the Fed has cut rates by more than 3 percentage points. Banks have passed along about half of those cuts to consumers and businesses who have loans tied to the prime rate, which is now 8.5%.

But consumers have gotten unusually stubborn about spending. People such as Friedrich underscore the point. Although she said she was once “extravagant,” she now yearns only to pay off her debts and start saving. And she is not alone.

America’s consumers have also cut back. Anecdotal and statistical evidence show that individuals have become far more financially conservative.

Consider Elana O’Brien, 27, a marketing director working for the accounting firm of Coopers & Lybrand. In past years, she was busy buying clothes and cars and other items. No longer.

“I had been running along charging this and charging that, and all of a sudden, I looked back and thought, ‘What am I doing?’ ” she said. “Until I pay off all my credit cards, I am not buying anything.”

Dale Carlson, a San Francisco resident, said he, too, has become increasingly frugal for personal and practical reasons. His son starts college this fall, and he is reluctant to spend when the economy seems in a slump.

“Even if you have a job right now, a lot of companies have frozen salaries, bonuses and wage increases so you may not be making as much in real wages,” he said. “Besides, we are a little burned out on the consuming of the 1980s--burned out and probably overextended. That has to have an effect on your spending.”

Cheryl Pelletier, a business systems analyst at Transamerica Insurance in Woodland Hills, said her mortgage payments have dropped by about $100 monthly. She will be using that money to pay off her debts, she said.

Even lower prices do not seem to tempt these reformed spenders. With housing prices down and the cost of an adjustable rate mortgage at the lowest level in history, houses are more affordable than they have been since 1989, according to the California Assn. of Realtors. Adjustable rates now start at 7.3%. The cost of a 30-year fixed mortgage, at 9.57%, is at a four-year low, said Paul Havemann at HSH Associates in Butler, N. J.

But California housing sales were up only 3.7% during the first three months of 1991 from the previous quarter, and are still more than 23% below year-ago levels, said Leslie Appleton-Young, vice president of research and economics for the realtors group.

The picture is similar in the auto market. Car makers and dealers are now offering low-rate financing and thousands of dollars off. But in April, auto sales plunged 17.9% below year-ago levels, auto makers said.

Overall, consumers bought $18 billion less in March than they did last September, when spending peaked. And in the last three months, they have paid off nearly $8 billion of their installment debts, according to government statistics--lowering the total to $731 billion.

Americans are burdened with debt generated in a decade-long spending spree. Last year, consumer installment debt reached a stunning $739 billion--up from $716.6 billion the year before and from $664.7 billion in 1988. In 1980, consumer installment credit was under $300 billion. With the economy still looking uncertain, many say such staggering debt levels are more than a little unsettling.

Some consumers are staying away from shops and malls because they are worried about the economic slump. Since this time last year, companies have cut their payrolls by nearly 700,000. Moreover, many have scaled back pay raises, so that after inflation and income taxes, personal income has fallen.

In addition, baby boomers are aging and having babies. Once they become parents, many of these onetime super-consumers have become more practical. Instead of coveting $100 shirts, they are saving for retirement and their children’s education, industry experts say.

“There is a serious change in attitude,” said Michael Aronstein, president of Comstock Partners in New York. “Maybe it is the wisdom that comes from being alive for 40 years instead of 28. But people are looking back on the last decade and saying, ‘What have I done?’ ”

Today’s economic problems also involve the heavy debts incurred by corporations and government.

Companies borrowed heavily in the 1980s, too. Some of that borrowing was needed to support corporate growth, but often it was used to buy other corporations. Industry experts have estimated that the “leveraged buyout” boom added between $200 billion and $500 billion in debt to company balance sheets.

Meanwhile, the U. S. government was supporting the biggest peacetime defense buildup in history. That, coupled with the $500-billion savings and loan bailout, caused the so-called “public debt” to soar.

The result: Commerce Department statistics show that interest payments will reach nearly 35% of the value of the gross national product in 1990--the highest percentage in history. In 1980, the ratio was less than 25%; in 1970, it was less than 15%.

In other words, borrowers--as a whole--have become somewhat less credit-worthy. To make matters worse, skittish bank regulators eager to avoid another savings and loan crisis--have tightened lending rules and raised the cost of doing business for many banks.

Facing growing scrutiny and increasing problem loans, many banks have become less eager to lend. Because of that, they have been slow to pass on rate cuts started at the Federal Reserve. Consequently, even though the Fed started cutting rates almost two years ago, consumers are only now really beginning to feel an impact.

Some, who only have credit card debts, may never see the reductions. Although some rates have fallen sharply in the last few months, credit card interest rates have stubbornly remained in the 19% to 21% range.

Nevertheless, some contend that they will not be spending anytime soon, regardless of rates.

“The lower rates don’t inspire us,” said Robin Seastrom, a La Canada Flintridge housewife. “We can’t afford anything anymore. Even though we kept saying we had to watch our spending, we never did. Now we are very motivated. We want to have some money in savings.

“We know we can buy things at a lower interest rate,” Seastrom added. “But it would still be adding another bill.”