Spending Their Way Toward a Recovery
Home sales in Los Angeles County jumped by more than 20% last month. At a Mercedes-Benz dealership in Newport Beach, about 600 people have made deposits on a new line of sports cars starting at $85,000. And at Wal-Mart and other retailers, the cash registers just keep ringing.
The signs are everywhere: Consumers aren’t letting up.
“It’s the best time to buy,” said retired Laguna Hills resident Frances Fremin. She and her husband already have booked two trips to visit relatives in New Orleans and North Carolina; they couldn’t resist the bargain air fares. “If there’s something I need, I’m going to get it,” she said.
For months, such determined spending has kept the teetering economy from collapsing, and now is prompting economists to boost their outlook for near-term growth.
Sung Won Sohn, chief economist at Wells Fargo & Co., previously thought the first quarter would pretty much be a repeat of late last year--little or no growth. But now, he’s projecting the nation’s gross domestic product--the value of all goods and services produced--to grow at a solid 2.5% rate this quarter.
“We’ve been revising our growth rate upward virtually every week,” said Sohn, noting that it’s largely because of the indefatigable consumer, whose spending drives about two-thirds of the economy. “It’s been a pleasant surprise after a pretty tough time last year.”
The overall economic picture is still hazy, with perhaps the biggest risk being the widening crisis over accounting irregularities in corporate America. It also remains to be seen whether consumers, many of whom are heavily in debt, can keep up their hearty spending. Personal bankruptcies hit a record last year.
But there are good reasons to think consumers won’t disappoint.
The unemployment rate (5.6% in January) remains low by historical standards, and economists are expecting a resumption of job growth soon, which would mark an end to the recession that began last spring.
The same factors that have boosted consumers’ purchasing power in the last year are expected to remain in place: strong productivity, scant inflation and low interest rates. What’s more, tax cuts passed by Congress last year will translate into roughly $70 billion in savings in 2002, and home mortgage refinancings should kick in an additional $50 billion in consumer spending this year, according to a new report by Deloitte & Touche.
“I personally feel we’re out of the trough and starting to head north,” said Bob Grand, a managing partner at the accounting and consulting firm.
But some economists say that consumers have spent so much that there won’t be much pent-up demand as the economy recovers.
Edward Leamer, director of UCLA’s Anderson Business Forecast, looks at the spending statistics and shakes his head. He says this is the time consumers should be saving more, and it’s especially so with the first wave of Baby Boomers nearing their retirement years.
“The fact that we’re seeing increasing spending [in the current economy], is symptomatic of a myopic consumer who can only see a year or two ahead,” said Leamer, who is sticking by his previous forecast that calls for weak economic recovery in the short-term.
“When you come out of a recession, you need something to give you a boost,” said Dean Baker, co-director of the Center for Economic and Policy Research, a think tank in Washington. “And in this case, it’s going the wrong way.”
But right now, that’s hard to see. Weekly reports on chain-store sales have shown persistent growth this year. The latest report, for the week of Valentine’s Day, indicates sales at stores open at least a year jumped more than 5%--the strongest reading since early January of last year. Business picked up across the board, said the Bank of Tokyo-Mitsubishi.
Store managers and salespeople say consumers continue to be lured by bargains and terrific financing deals, many of them initiated after the Sept. 11 attacks and still in place.
“We used to never have a sale here in this particular store,” said Laurence Ueland, a saleswoman at Hermes at South Coast Plaza. The high-end boutique in the Costa Mesa mall has been whacking 40% to 60% off the prices of some clothes and shoes. Customers love it, Ueland said.
“People get in their mind that they can get this great deal,” said Denise Banner, a saleswoman at Fletcher Jones Motorcars in Newport Beach, one of the nation’s largest Mercedes-Benz dealerships. More consumers are wanting to haggle, she said.
Car sales have been robust because of zero-percent financing and other promotions. Fletcher Jones wouldn’t say what kinds of deals its buyers are getting. But like many dealerships, Fletcher is having a terrific year. With nearly 600 orders for the new SLs--with the top model starting at $125,000--Fletcher already is looking at sales of more than $50 million.
That luxury-car sales are holding up well suggests there’s still plenty of money out there. At Fletcher and other dealerships, it’s difficult to see the so-called negative wealth effect from the weak stock market.
Bill Boyer, a 60-year-old resident of Irvine, said this is a “cautionary time” and expressed concerns about wildly gyrating stock prices. But that didn’t stop him from dropping by Fletcher Jones recently to take a spin in a new Mercedes.
“After Sept. 11, [business] went in the toilet,” said Boyer, who sells software and technical services, “but it’s come back pretty good.”
For many people, the shocks from the stock market are being cushioned by steady gains in home equity. Indeed, the resilient housing market has been a surprising factor in the strong consumer-spending numbers. In contrast to the last recession, housing this time around has been a big plus, especially in places like Southern California, where real estate accounts for a larger share of the economy.
Last month, sales of new and existing homes in Los Angeles County surged 22% from January 2001, to a level not seen since the frenzied housing market of the late 1980s. Although the strong January sales--seen throughout the Southland--are unlikely to be sustained, analysts said figures suggest there’s still a big consumer appetite for homes.
Demand is propelling price gains, in turn pushing more consumers to trade up and refinance because interest rates are so low. The 30-year fixed mortgage rate averaged 6.81% last week, not far from a record low reached last year, and analysts say the outlook is favorable.
The bottom line: If home sales and prices continue to rise, as some analysts are expecting, that will spur more consumers to remodel kitchens and buy furniture and other big-ticket items.
Said Alec Levenson, a labor economist at USC’s Marshall School of Business: “It’s probably too early to say, but it looks like the negative impacts of Sept. 11 may be a lot more short-lived than we thought.”
