Consumers Positive, Market Worried: Both Right

Can the American consumer carry the world economy on his or her shoulders? That was the implied question last week as fear invaded the stock markets and gloom continued to surround Asia.

Yet Federal Reserve Board Chairman Alan Greenspan, 72, told Congress that the performance of “the American economy is as impressive as any I have witnessed in my near half-century of daily observation. . . . American consumers, with their incomes and wealth on a strong upward track, remain quite upbeat.”

Upbeat, indeed--the latest surveys show consumer confidence at 30-year highs.

But the stock market went into cardiac seizures last week, tumbling, climbing, falling again. Anxiety about profits, stock prices, the world economy was pervasive.


Is consumer confidence misplaced? No, it is well-founded and long-term. Real wages--income over and above inflation--are rising consistently for the first time in three decades. There is money in consumers’ pockets.

As important, rising wages are the result of years of business investment, the force that has driven the U.S. economy through this decade of recovery. Investments in new equipment and in more-efficient ways of doing things have expanded the capacity of the U.S. economy and generated high employment.

Jobs are seeking workers in many places--unemployment is little more than 1% in Madison, Wis., for example. No wonder consumers are confident. The stock market plays a role too--the average American’s mutual funds and retirement accounts have swelled in value.

Yet there is no conflict between a worried stock market and contented consumers. The markets have reason to worry because earnings for many companies are declining. Profit gains are getting harder to produce in a competitive world in which entire continental markets, as in Asia, are mostly shut down. Investment may be about to slow too, because it has been rising at an “unsustainable rate of 22% a year,” says Charles Clough, chief investment strategist at Merrill Lynch.


The outlook therefore is for a slowdown in the growth of the U.S. economy--but only from 3% a year to 2%, nothing drastic or recessionary. That kind of adjustment is not likely to dispel consumer confidence.

“We’re at low unemployment and people are enjoying real wage gains for the first time in decades,” says economist Diane Swonk of First Chicago NBD Corp., a major Midwest bank holding company.

“Real wages” is economist-talk for wages that are gaining in purchasing power because they are going up faster than inflation, which has been very low. For more than 20 years, there were no consistent gains in real wages. But lately, since 1995 and with increasing vigor in the last year or so, real wages have been rising again.

Thus purchasing power is high. “We’re beginning to see wealth effects in consumer buying, trading up in vacation homes, things like that,” Swonk says.


“Customers are going for the splurge car, the more luxurious model. Mercedes, BMW, Lexus, Jaguars, they’re all selling,” says Fritz Hitchcock, of Hitchcock Automotive Resources, a Puente Hills-based owner of multiple car dealerships in Southern California.

So to the question, “Can the U.S. consumer carry the world economy?,” the answer is yes, for a while.

What has happened to make this possible is the real story, a model that could help the rest of the world achieve high employment and rising wages without inflation.

The surge of U.S. business investment in the early ‘90s was key. “It was historic,” says Clough, who credits this period with a transformation of U.S. industry and the financial system.


The investments replaced old ways of doing things with computerization, outsourcing of work and improved communications to facilitate delivery of goods and services.

For years, such investments were controversial. Profits rose but wages were slow to follow. Many thought that workers were being left behind permanently in the new prosperity. Problems of income inequality worsened.

But the results of the investments began to appear in 1994, in rising profits, new-business start-ups and rising employment. Unemployment fell, wages began to rise and inflation remained subdued.

Income gaps that were widening have begun to narrow with economic growth, although problems remain, says economist James Galbraith of the University of Texas, author of “Created Unequal,” a forthcoming book on contemporary wages.


Greenspan noted all that last week in testimony to Congress explaining that the U.S. economy was strong even as worries mounted over the global picture.

So what lies ahead? Investments similar to those that remade U.S. industry are being made in Western and Eastern Europe and Latin America. Asia will be recovering and modernizing its economies over the next five years.

For the U.S. economy, most predictions, including Greespan’s, are that there will be a slowdown in the next year. But we should put those forecasts in perspective. Unemployment won’t grow much in any slowdown. With the U.S. working population growing only 1% a year, labor shortages are more likely than rising joblessness.

With Americans employed and consuming, stock markets will fluctuate but won’t collapse.


Fact is, today’s economy is simply different from that of the past. Last week, Greenspan predicted that the economy would grow 3% to 3.25% this year and 2% to 2.5% in 1999--an addition of roughly $200 billion a year in goods, services, jobs and incomes to the economy.

But only five years ago, 2% growth was all that experts said was possible for the “mature” U.S. economy. “The U.S. has not made the investments in its industrial infrastructure to be able to grow any faster,” went the refrain at that time.

So investments were made, and now the economy, evidently, is capable of a whole lot more. That’s why real wages are rising and U.S. consumers--not indefinitely, of course, but for a while--can carry the world on their shoulders.



James Flanigan can be reached by e-mail at


The Right Direction

Consumers are confident because the purchasing power of their wages is rising consistently for the first time in more than 20 years.


Average hourly earnings for production workers* in 1982 dollars for June of each year

June 1998: $7.74 (preliminary)

* Paid on an hourly basis rather than salaried.

Source: Bureau of Labor Statistics