Job Insecurity Seen as a Drag on Spending

If Federal Reserve Chairman Alan Greenspan is counting on the consumer to bail out the ailing American economy, his chances of success increasingly appear dicey, some analysts say.

The betting in some quarters is the Fed may not be able to keep the Great American Spending Machine fired up because the job market is beginning to scare a lot of people.

Those concerns were amplified Friday, when the government reported that the U.S. economy lost a net 223,000 jobs in April, pushing the unemployment rate to 4.5% from 4.3% in March.

The risk is that job insecurity could prompt consumers to pull back on spending, which would knock out the last peg that so far has kept the weakened economy from falling into recession.

Some experts say we are seeing the sequence of events that are typical in the early stages of a recession, which is defined as an actual contraction of economic activity, not just a slowdown.

“As employment deteriorates, so does confidence, leading to cutbacks in consumer spending, inventories and ultimately production,” says Kathleen Camilli, director of research for brokerage Tucker Anthony.

While many manufacturers already have cut production, they could be forced to make even deeper cuts if demand tails off sharply from recent levels.

Camilli estimates there’s a three-month delay between the time consumers’ confidence in the economy dives and when it translates into actual cutbacks in spending.

Consumer confidence is critical because their spending accounts for two-thirds of the nation’s gross domestic product.

While confidence slid in April, the Conference Board, which surveys 5,000 U.S. households, says its confidence index still wasn’t near levels usually seen prior to a recession.

But can people’s confidence level remain immune to the negative headlines of rising job losses?

For a time, but not forever, said Bill Valentine, president of investment firm Valentine Ventures.

So far, confidence surveys have been about “people saying one thing and doing another,” he said. “Today, we have consumer confidence dropping, yet people are spending as robustly as they were a year ago,” especially on such big-ticket items as homes.

“Consumer confidence is simply a reflection of what the mass media are telling people. It’s a case of the media telling people what is going on, rather than what people are actually experiencing” in terms of their own jobs and lives, he said.

“Sure there are a lot of layoffs, but it’s not the kind of unemployment that doubled in the 1980s,” Valentine noted. “People are not looking over their shoulders and worrying about their next paychecks” because job losses haven’t been widespread enough, he said.

Still, the job market is turning uglier and the risk is that if people fear they could lose their jobs, they will close their wallets.

The Fed’s campaign to lower interest rates this year has helped reduce some families’ debt burdens, but if consumers become frightened enough many won’t borrow to spend even if credit is cheaper and readily available, economists note.

Central bank policymakers meet on May 15, and are widely expected to again cut their key short-term interest rate, now 4.5%. The rate could be cut to 4%, or perhaps even lower if other economic data leading up to the meeting suggest a deepening slowdown, experts say.

But analysts warn that it takes up to a year for easier Fed credit to filter through the economy.

The employment numbers will continue to get worse, many economists say. For many consumers, fear about keeping their jobs will compound the anxiety created by the stock market’s decline over the last year, which has cut into millions of Americans’ net worth.

Yet the stock market may now provide some help to sentiment: Shares have rallied broadly from their two-year lows reached in early April, and rose again Friday despite the employment report.

For the week the Dow Jones industrials gained 141.19 points, or 1.3%, to 10,951.24, while the Nasdaq composite index surged 115.85 points, or 5.6%, to 2,191.53. The Dow is up nearly 17% from its recent low. Nasdaq is up nearly 34% from its low.

The markets’ action points up Wall Street’s faith that, despite the potential for more trouble in the economy near term, the Fed is committed to cutting interest rates to whatever level is necessary to turn things around by year’s end.

Historically the stock market has almost always rallied well in advance of the low point for corporate earnings in times of economic weakness, analysts note.

But Wall Street’s bears say investors may be too optimistic and haven’t factored in just how much more profit pain companies may endure if a deep recession is in the cards for the second half of 2001.