Global Fears Weighing on Businesses
Businesses across the nation, including restaurants, car dealers and discount retailers, are worried that rising geopolitical tensions could rattle consumers and further weaken an economic recovery already fraying.
Some analysts in recent days have raised the odds of a recession amid new data showing a drop in consumer confidence, disappointing retail sales and another surge in oil prices. Investors, fearing slower growth, last week sold off stocks and bought relatively safer Treasury bonds.
Energy prices, the stock market and Middle East turmoil “really have taken a grinding toll on the psyche of the American consumer,” said Preston Cox, owner of Embudo Station, a restaurant about 40 miles north of Santa Fe, N.M., that has seen sales drop about 30% this year.
Peggy Lui of Pasadena said Mideast unrest, combined with higher gasoline prices and proposals in Washington to alter Social Security, have led her to trim purchases. Lui’s finances are in good order -- she bought her condominium in 1999 when prices were low, traded in her car for a fuel-efficient sedan and paid down her student loans since graduating from Pepperdine University in 1989.
But the insurance claims specialist is no longer taking last-minute vacations or frivolous shopping trips, she said.
“Now you have to really think about ‘How do I cushion myself and still survive,’ ” no matter what turn the economy takes, Lui said. “I’m still cautious about my purchases because you don’t know what’s going to happen.”
Analysts say the latest worries are increasing the chances that the Federal Reserve and its new chairman, Ben S. Bernanke, will pause its 2-year-old program of raising interest rates at its policymaking committee’s next meeting Aug. 8. Although the central bank probably is worried about the latest surge in oil prices -- blamed primarily on rising Middle East tensions -- those inflation concerns could now be trumped by worries over a slowing economy.
“It’s the toughest decision our newest Fed chairman has faced,” said David M. Jones, president and chief executive of Denver-based DMJ Advisors.
All economic eyes and ears will be on Bernanke on Wednesday, when he is set to give a semiannual report to Congress on the state of the economy. It will be the chairman’s second such appearance, and a pivotal one, analysts say. His challenge, experts say, is to bolster consumer confidence and keep inflation under control without raising rates too much and risking a recession. The core consumer price index, a key inflation indicator that excludes volatile energy and food prices, is at 2.1%, above the Fed’s target of 1% to 2%.
“He’s going to have to explain how to deal with a series of crises that are going to continue to slow the economy while at the same time put upward pressure on inflation,” said Joel Naroff, president and chief economist of Washington-based Naroff Economic Advisors.
No mainstream economist is predicting a recession anytime soon. The economy by most measures is still in decent shape, and economists expect it to grow at a rate slightly below normal, from an abnormally high 5.6% in the first quarter to 2.5% for the rest of this year. Growth of 3% is normal for a recovery. But growth could slow further if consumer confidence falls steeply.
President Bush, meeting with world leaders in Russia over the weekend, attempted to reassure consumers that the country’s economy remained strong, thanks to tax cuts and a lower-than-expected budget deficit, announced last week.
“By pursuing pro-growth policies and restraining government spending, we will keep our economy the envy of the world,” Bush said in his weekly radio address.
But the latest economic data is not encouraging. Retail sales fell 0.1% last month, led by a 1.4% drop in auto sales, according to a Commerce Department report Friday. That surprised analysts who had predicted a 0.4% gain.
Consumer confidence fell this month as people braced for higher inflation, according to the University of Michigan’s midmonth report. Analyst Jones said the decline “suggests that higher energy prices are starting to hurt the consumer side, making consumers more negative psychologically.”
Given consumer spending patterns, Naroff and other analysts increased the chances of a recession to 30% last week from 25% before. Fed economist Jonathan Wright places the odds even higher, at 36%.
“People are cutting along the edges rather than cutting more fundamental purchases” as they would before a recession, Naroff said. But he warned that people could slow the economy by dining out less frequently and buying less furniture and clothing.
“When you start to see that type of spending cut back, that’s when you know you’re nearing a recession,” Naroff said.
Another worry is that even the more affluent -- normally far less affected by gasoline prices than those with lower incomes -- are showing signs of caution.
Brunswick Corp., the world’s largest maker of recreational boats, last week reported that sales fell 10% in its latest quarter. The company cited “significant declines in retail demand,” especially for boats priced from $100,000 to $250,000.
Annapolis, Md., yacht broker Frank Gary already was seeing declining sales this year as his normally well-heeled customers scaled back amid surging gasoline prices, flattening home prices and a sluggish job market. But now, escalating Middle East violence could make things even worse, Gary said Saturday as prospective buyers balked at his sales pitch for a new 27-foot powerboat.
“It’s just one more strike against people’s willingness to spend money,” said Gary, who handles boats with price tags of $18,000 to $2.5 million. He said he didn’t expect his slumping sales to pick up soon. “We’re selling luxury items. People are holding off buying boats, waiting to see what the economy does.”
At Tustin Acura in Orange County, sales manager Alex Chung said he has seen plenty of wealthy shoppers, but fewer buyers. Sales have dropped 25% compared with this time last year. Chung tried offering promotions and discounts, but many shoppers want something he can’t offer, he said: security, assurances that gasoline prices will stop rising and international discord will be resolved.
“They want to hold off and see. They want to have money in the bank rather than drive a nicer car, especially with what’s going on now in the Middle East and North Korea,” Chung said.
Nationwide, sales at all retail stores open at least a year rose 2.6% in June, slower than this year’s average 3.8%, according to the International Council of Shopping Centers.
Tom Saquella, president of the Maryland Retailers Assn., said sales of appliances, housewares and furniture began to drop in May, even among the affluent, after home building slowed nationwide in March. Now retailers are trying to guess how much spending will slow as they buy inventory for the winter holidays, Saquella said.
“I think at this point they’re going to be very cautious,” he said.
Restaurants are usually busy this time of year across northern New Mexico and southern Colorado, but eatery owner Cox expects sales to drop more than normal when tourism slows at summer’s end.
“I’m sure after the first of September it will fall off the map,” said Cox, president-elect of the New Mexico Restaurant Assn.
Restaurants in Los Angeles serving mid-priced fare are still doing well, said Tony Palermo, president of the Los Angeles chapter of the California Restaurant Assn. and owner of Tony P’s Dockside Grill in Marina del Rey.
Palermo has noticed less traffic in the marina and more sharing of trips by boaters rocked by high fuel prices. But for now, he said restaurants like his -- where dinner entrees of such comfort foods as pasta or ribs start at $11.95 -- may be benefiting from the economic uncertainty.
“We’re an outlet for people’s anxiety in some ways -- you know, you had a rough week, go out to eat,” he said.
Next door at Cafe del Rey, where a serving of Florida red snapper goes for $32, general manager Laurie Pesce said sales were up from last year. But she expects delivery and other costs to rise and competition for corporate business to heat up even as the economy cools.
“It’s a very tough and competitive industry,” Pesce said. “You add the economy on to that and it just makes it that much tougher.”