Consumer Spending Spree May Be Ending
After propping up the U.S. economy for more than a year, the American consumer is beginning to fade.
Even before Friday’s report of a big surge in unemployment last month, surveys found consumers growing less confident about the economy and surprisingly inclined to save their federal tax refunds rather than spend them.
Such caution may be prudent at the household level--but it could be disastrous for the country as a whole. Many economists and policymakers had counted on consumers, bolstered by $38 billion in federal tax rebates, to go on a buying spree that would ward off a recession. Now they’re not so sure that will happen.
“It’s slowing down, unequivocally and unquestionably,” said Carl Steidtmann, who tracks consumer behavior for Deloitte Research in New York. “For a whole lot of people, debt reduction and trying to rebuild their savings is of utmost importance right now.”
Economists say those instincts will be intensified by the unexpectedly grim employment statistics released Friday. The Labor Department said the number of Americans with jobs plunged by 986,000 in August, pushing the unemployment rate to a four-year high of 4.9%.
So far, most broad economic indicators suggest that consumers have barely begun to notice their declining employment prospects. Retail sales slipped in July, but overall consumer spending ticked up. Sales of autos and existing homes were down, but new houses, furniture and appliances posted gains.
Last week, though department-store and apparel chains generally reported weak August sales, some major discount chains reported decent gains.
Dennis Knox’s coffee pot is a different kind of indicator.
Knox, a 45-year-old marketing executive in Seattle, woke up Tuesday morning to discover his coffee maker had died. He went to Williams-Sonoma, the upscale kitchenware retailer, for a replacement. But he walked out without one, figuring he could get a better deal by trolling the Internet.
“Last year or the year before, I probably would have just bought it here,” Knox said outside the store. “I could still spend $120 on a coffee pot, but I am a lot more willing now to see if I can find one for $80 with some footwork. It’s hard to watch your 401(k) [retirement plan] go down and not wonder about the economy, wonder when it’s going to catch up with you.”
That kind of anxiety is evident in broad measures of consumer sentiment. Consumer confidence indexes compiled by the Conference Board and the University of Michigan have been falling for about a year.
Two-thirds of those surveyed by Michigan in August said they thought the economy was in decline. Of those who expected to get tax refunds, 46% planned to use the money to pay down debt, 36% intended to sock it away, and only 18% planned to spend most of it.
Interest Declining in Major Purchases
Consumers are becoming particularly cautious about big purchases. The Michigan survey showed a declining number of people planning to buy new cars, despite falling interest rates and widespread discounting. Plans to purchase furniture, appliances and home electronics remained near their lowest levels in 10 years.
To many economists, those findings could spell trouble. When consumers become worried about the economy and postpone major purchases, that makes the economy still weaker.
A few big-screen TVs here, a few minivans there, and before you know it you’ve got a recession. “I do not think the consumer is going to pull us out of this period of weakness,” said Allen Sinai of Primark Decision Economics.
Leona Lassiter certainly won’t. At 69, Lassiter lives in a small house in rural Alabama, cooled by window air conditioners. She wanted to buy two new ones this summer, but decided against it because of the cost. She’d already spent $5,500 to replace her broken-down 1989 Lincoln Town Car with a ’98 Ford Escort.
“We’ve been so hot,” Lassiter said. “I needed two more units for the windows. But I thought, well, we’ll wait till next year, maybe it’d be better.”
Lassiter’s only source of income, Social Security, appears secure enough. But she said recent layoffs at a paper mill down the road and other signs of economic turmoil had made her more budget-conscious. “Looks like we’re in a rough spot right now,” she said.
That kind of household thrift has not been a hallmark of the unusual economic cycle that began with the bursting of the dot-com bubble early last year. Month after month, ebullient consumers kept on buying while panicky businesses dumped unwanted inventory and stopped investing in new plants and equipment.
By the second quarter of this year, economic growth had slowed to an annual rate of 0.2%. Without the increase in consumer spending, the economy would have shrunk for the first time in eight years.
“If consumers responded the way businesses did, we would have had a recession,” said Richard Curtin, director of the University of Michigan’s consumer confidence survey.
Lower interest rates supplied much of the fuel for consumer spending. Long-term mortgage rates began falling a year ago. And the Federal Reserve has cut short-term rates seven times in 2001 for a cumulative reduction of three percentage points.
Americans responded by buying nearly everything in sight. Home, auto and apparel sales have set new records in 2001. So has consumer debt. But now the main engine of the new economy has begun to sputter and wheeze.
Robert Michaels, president of General Growth Properties, a Chicago-based real estate investment trust, sees signs of spending fatigue in sales reports from the 150 shopping malls owned by his firm. “There’s no question it has been slower than a year ago,” he said.
Many consumers are “trading down”--purchasing less expensive goods at less fashionable outlets, instead of buying fewer items or doing without, Michaels said.
Rhachel Shaw of Los Feliz is a case in point. Shaw, 27, has been looking for a job for a month, with no luck. Instead of eating at her favorite restaurants, such as Eat Well in Silver Lake, she’s been buying fruit, rice and noodles and eating at home. And instead of shopping for groceries at the posh Mayfair Market in Los Feliz, she goes to Vons.
Even the federal tax refund checks that the government began mailing in July haven’t reignited consumer ardor. “Mine will go to debt relief,” said Chris Jaynock, a 29-year-old Atlanta architect. “I’ve done a lot of spending in the last two years, and now it is time to retreat and back off.”
Luxury goods have been hit hardest. Capt. Kirk Warner, manager of Park Marine Boating Center near Georgia’s Lake Allatoona, measures the state of the economy one big boat at a time. So far, he’s down eight for the year.
“I don’t think [the economy] has affected their bankbook as much as the feeling of overall wealth,” he said. “When they feel wealthy, they buy wealthy things.”
A few miles down Interstate 75 from Warner’s boat emporium, Three Way Campers in Marietta is selling fewer “motorized” RVs, which cost $55,000 to $140,000. Smaller “towables,” which top out at about $25,000, are still attracting buyers.
“People who had so much money made in the market would come out [and buy] a $100,000 motor home because they had the money,” owner David Porter said. “But then, when the stocks they held went from $50 a share to $2, it wasn’t there to spend.”
Others have felt the squeeze too. At Mayors, a jeweler in Northern Virginia’s glitzy Tysons Galleria, sales have been in the $8,000-to-$9,000 range recently, down from $20,000 or more in better days. “Yes, they’re hurting,” managing director Ty Elaryan said of his clientele. These days, he said, a typical customer buys a 1 1/2-carat diamond. “In the past, a 2-carat was an easy thing to sell.”
AVA Northwest, a Seattle shop that designs and installs customized audio-video and home-theater systems, has taken a bigger hit. “A lot of our clients are the high-tech, dot-com, Microsoft types who had big stock option packages that have suddenly shrunk,” said manager Fred Gallimore. “Some are scaling back, and some are holding off completely.”
The Harley-Davidson dealership in Edison, N.J., sold more than 400 motorcycles to well-heeled road warriors last year, but manager Ryan Rasimowicz said volume is down about 10% so far in 2001.
At Stanford European Motors in Palo Alto, sales manager Chris Sanders wishes he were so lucky. Sales of Ferraris, Lamborghinis and Porsches are off about 30%; a Ferrari Modena that might have fetched $300,000 last year is selling for $200,000 in 2001, he said.
Twice New, an upscale “resale” apparel store in Houston’s exclusive River Oaks area, is attracting a new class of clientele to its racks of expensive used designer clothes. “Career women want to wear clothes with a good cut but can’t afford it,” said manager Barbara Kunec. “I’m noticing more working women coming in for a look. I think the economy has something to do with it.”
Layoff Announcements Prompt Caution
Analysts attribute the decline in consumer confidence mainly to the deteriorating job market, particularly to the drumbeat of layoff announcements. In August alone, big companies announced plans to lay off 140,019 workers, boosting the total for the year so far to a record 1.12 million, according to Challenger, Gray & Christmas, a Chicago outplacement firm.
More big reductions are in the cards for September. Last week, American International Group Inc., a big insurer, announced it was eliminating 1,500 jobs. Hewlett-Packard Co. and Compaq Computer Corp. said their planned merger would put 15,000 people on the streets.
The nation’s unemployment rate has climbed from 3.9% last October to 4.9% last month. The number of people drawing jobless benefits rose to 3.17 million, the highest level in nearly nine years.
For those caught in the switch, the adjustment has been severe.
“When I was working, I ate out five to six nights a week at all the hottest spots in San Francisco,” said Eric Frommer, a Bay Area tech industry worker whose career collapsed along with the dot-com sector. “Now if I go out at all, it’s to Asian restaurants and to drink beer. It’s a comedown.”
But even for those who are holding on to their jobs, economists worry that the sagging stock market will be enough to dampen their urge to buy.
On Long Island, bakery worker Carlos Gaviria said the market collapse has caused him to rein in his personal spending. If enough people do the same, he said, it could add up to something big.
“What’s going on on Wall Street . . . tells me that whatever money I have, I have to hold on to, because it isn’t predictable what’s going to happen tomorrow,” Gaviria said. “By holding my money, maybe I am affecting the economy itself.”
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Times staff writer Erika Hayasaki in Los Angeles, and researchers Edith Stanley in Atlanta Lynn Marshall in Seattle, Lynette Ferdinand in New York, Lianne Hart in Houston, Robert Patrick in Washington and Norma Kaufman in San Francisco contributed to this report.
